Vanguélis Panayotis: In this duet, Christophe Barraud will talk about macro issues, while I will translate the impact this could have on the hotel industry.

If we look at our sector on a global scale, concentrating on the three leading regions of China, the United States and Europe, we can see that there was a downturn during the Covid period, followed by a phase of normalisation in demand. We can see that this movement has been slower on the Chinese market because of uncertainty and volatility.

Christophe Barraud: The idea is to cover the main macroeconomic and financial themes that impact all the markets, but also the whole world. China is a real issue today. On the positive side, the hotel industry is doing well. However, the country is at a stage where activity is likely to slow again next year.

The post-Covid rebound has been relatively disappointing in China, unlike in other developed countries. If we exclude the hospitality sector, it is entering a phase where there will be negative pressures, which can be explained by various cyclical and structural factors.

The first factor is that the country is still in a phase of normalisation on the property front, with the bursting of a bubble in 2021 still ongoing. We are still in a situation where transaction volumes and prices are falling, despite an attempted rebound at the start of the year.

This is a major problem for China, since it is having an impact not only on the construction sector but also on household consumption. Chinese households' wealth is centred on property, which accounts for between 60 and 70% of their total assets. The fact that the market is under pressure is therefore having an impact on their confidence levels and their spending.

Added to this are all the uncertainties surrounding education and health costs. We are also seeing a demographic reversal in China, which will also have a negative impact on medium- and long-term growth prospects.

As a reminder, 2012 was the first year in decades that the Chinese population declined, and this is likely to happen again in the years ahead.

The other major point impacting on the Chinese environment is all the current tensions, both trade-related and geopolitical. Trade tensions began under Trump and have been amplified by recent conflicts. As a result, in the macroeconomic data we can see today, there is more capital leaving China than coming in.

We are in a world that is becoming protectionist, where Chinese companies are more likely to focus on their domestic market. A phenomenon that is also affecting the hospitality sector.

Vanguélis Panayotis: Let's turn now to geopolitics, based on all these macroeconomic data that also remind us of China's weight in world trade. In particular, there was the geopolitics of the economic influence of Chinese players on tourism, with takeovers.

Since 2012, we have seen the rise of Chinese groups. This phenomenon is based on two pillars. A pillar of growth driven by their domestic market, with a large number of hotels and rooms opened. A second growth pillar based on acquisitions, including the purchase of ClubMed and Louvre Hotels Group, as well as the acquisition of stakes in several companies.

In recent years, we have seen the sale of businesses, such as Carlson in the United States to Choice Hotels Group. The question now is whether Chinese economic players will continue to be players in external growth through acquisitions.

It would appear that this is less the case, as they have decided to focus on their domestic market, which still has growth drivers. There is still some way to go to reach critical mass in their domestic market. Are we going to see this refocusing at domestic and regional level of China's economic influence on the hospitality sector?

Christophe Barraud: We live in a very unstable world, with increasing geopolitical tensions of late. Beyond all the pure tensions, attention is focused on the conflicts that are taking place, such as in Ukraine and Israel. The risk today is of a new energy shock, more focused on oil.

We are in a deficit phase, meaning that there is far less oil supply than demand. This is due to both random and voluntary factors, with producers such as Russia and Saudi Arabia limiting their production.

We also have relatively low world stocks. So if the conflict were to flare up, we have a whole host of potential risks that could affect this market in deficit. This could potentially result in a spike in oil prices.

These external factors could be sanctions against Iran or logistical disruptions around the Strait of Hormuz. We'll have to keep a close eye on this, but on a more positive note, the conflict seems to have been fairly contained geopolitically over the past two weeks.

If the conflict does indeed flare up, and oil prices soar as a result, this could be negative for importing countries, including Europe, but beneficial for producing countries such as Saudi Arabia. It could also have consequences for the hospitality sector.

Vanguélis Panayotis: All these petro-monarchies have been investing in trophy assets for some twenty years. We mentioned earlier that the Chinese are turning in on themselves, but are we going to continue to have an appetite for hotel assets in this part of the world?

There have indeed been some very fine renovations, as well as emerging destinations such as Al Ula in Saudi Arabia. We can see the trajectory of this country in terms of hospitality, a sort of Dubai 2.0 on a larger scale. We are seeing a reuse of rather high-quality assets, particularly in Europe, as well as regional development among all these players.

Christophe Barraud: Interest rates have exploded in Europe and the rest of the world since the start of 2022. This is due to the reaction of central banks to galloping inflation, particularly in the eurozone.

Central banks have therefore decided not only to raise interest rates but also to reduce the size of their balance sheets. Technically, there will be much less liquidity in the global economy. The direct consequence is higher short- and long-term interest rates, but also tighter credit conditions. If you want to borrow today, you'll need a much larger down payment and better credit scores.

One central phenomenon is that the United States is the benchmark for interest rates worldwide. So it's essential to understand what's happening in the United States in order to anticipate what's going to happen there and, by extension, around the world.

Today, interest rates in the United States have soared. The 10-year rate has reached 5%, the highest level since 2007. This rise can be explained by the FED's monetary policy, but also by external events, such as a fall in demand for US Treasury bonds from China and Saudi Arabia.

This surge in rates is also, and above all, due to the exploding US fiscal deficit. This year, the deficit will be 6%, with health and military spending rising sharply. All these reasons explain why interest rates have risen much more in the United States than elsewhere.

As for Europe, the ECB has done the same thing as all the central banks in the developed world. It has raised its key interest rates since 2021 and reduced the size of its balance sheet. All this has had an impact on economic activity in the very short term, and will continue to do so in the quarters ahead. Generally speaking, the full impact of a monetary move is felt on the economy over a period of 3 to 4 quarters.

If we look at the figures for the eurozone, we had negative growth in the third quarter according to a Eurostat publication. The property and construction sector was the first to suffer, with loans contracting on an annual basis, construction spending collapsing and sales volumes and prices falling.

This is particularly the case in Germany, with double-digit falls in both existing and new housing.

Although interest rates have soared, they are set to fall again next year. On the one hand, economic activity is slowing and, on the other, inflation is gradually normalising. We should therefore be back towards the central banks' 2% target by the second half of 2024. This estimate applies to both Europe and the United States.

With the unemployment rate rising somewhat, central banks are likely to change their monetary policy. They are likely to lower their key rates by the second quarter of 2024, thus easing the pressure on the economies. However, interest rates will still be much higher than those applied over the previous 10 years. This will undoubtedly have an impact on investment decisions and therefore on the hotel sector.

Vanguélis Panayotis: Let's look at previous crises, such as the two Gulf Wars. The economy and the hotel industry took a long time to recover after the first war, around 5 years. For the second war, the time lapse was much shorter. We can say that technology, including revenue management, has enabled more dynamic and effective anticipations and corrections.

Since 2001, our sector has experienced two major cycles. The first was a period of almost 16% growth in RevPAR in Europe between 2001 and 2007. Then we had a long period until 2019, when we achieved almost 26% growth in RevPAR. After the Covid period, we have seen a very strong rebound in just two years. We have elements of resilience that are important. Now, how confident are we about this asset class and how resilient is it in the face of all these crises?

We are firmly convinced that we will once again be entering a market where expertise will create value. When we borrow at 1%, we 'delever' a lot of risk, and what offsets the risk is the expertise. We are in a market that is likely to restructure.

Christophe Barraud: All regions of the world will see a normalisation, so there are no expectations of a sharp recession or correction. We know that central banks are likely to adopt more accommodative policies. Nevertheless, some sectors will be winners and others losers.

The good thing is that hospitality has been a big factor of resilience, and that factor is not going to disappear overnight. Even if we are in a world where global growth will slow, the slowdown should be limited. To give you a concrete idea, growth was 3.5% in 2022, then 2.8% this year and next year it will be between 2.2 and 2.6%.