Bob Richards: Mid-Year Economic Review
The following was written by Bob Richards, Shadow Minister of Finance:
The Bermuda economy has been hurting for some time now. Companies are cutting back, people are losing jobs and paycheques are getting smaller. The time is right for a mid-year look at the economy, where it is and where it might go. The better we understand the prospects for the months ahead, the better we should be able to protect our people, navigate the continuing challenges and return the island to an even keel.
There are both external and internal factors affecting key components of the economy such as international business, tourism and construction, as well as government operations, public debt, cost of living and unemployment.
Let’s start with external factors.
US Economy
The US economy seems to be faltering, particularly in the all important consumer sector.
The first chart shows the results of the Changewave Research survey of expected consumer spending over the next 90 days. In 2007, consumers who planned to spend less money surpassed those who planned to spend more. That was at the onset of the recession. The trend line reversed itself in March 2010 at the start of the recovery, but then in July it dipped back down with consumers who plan to spend less once again more numerous than those planning to spend more.
This down-tick does not decisively signal the US economy is heading for the dreaded “double dip” recession because it occurred after an extended period of steady improvement. Nevertheless, there are other signs of weakness in certain categories of consumer spending that do not bode well for Bermuda. The Changewave survey, for example, revealed the biggest pullback in the travel/vacation sector in July, with consumer spending plans falling 10% below June. That is worse than the 6% drop of a year ago when the recession was in full swing.
We were hoping to benefit from a surge of “pent up” demand for vacationing, but this does not look likely, at least not for this season.
The second chart shows US Personal Savings as a percentage of Disposable Personal Income. Consumers can either save or spend their money. When they spend, their money circulates throughout the economy fueling growth and job creation. Saving has the opposite effect. The savings rate spiked during the recession, then retreated as the outlook improved. Unfortunately, savings have risen again in recent months and remain stubbornly high.
All this clearly is not good news for Bermuda tourism, bearing in mind that the high season has less than one more month to run.
Insurance/Resinsurance
In the reinsurance sector, quarterly earnings reports from Bermuda-based majors showed good underwriting results but a mixed bag insofar as earnings growth was concerned. Problems associated with the recession appear to be behind them, but there does not appear to be any sign of an imminent new wave of capital. The industry could be described as steady as she goes.
There remains a glut of office space in Hamilton, a condition that is likely to dampen any significant increases in overhead costs for insurers and other businesses on the island, at least over and above the average rate of inflation of 2.6%. This is not great news for Hamilton landlords, but good for the insurance sector from a cost-of-doing-business perspective.
Of course the Government’s payroll tax increase in the spring has worked to make the already high cost of doing business in Bermuda worse. This is likely to be unhelpful as it decreases the attractiveness of Bermuda for offshore businesses and directly discourages the creation of new jobs.
Construction
It is difficult to quantify the state of our construction industry because there is no up-to-date data. However, anecdotal evidence says the industry is in a major recession. Private sector projects are drying up and the Government’s ability to stimulate the sector has been weakened by poor planning, waste and spending excesses that have scarred its record. There is high unemployment among Bermudians in this sector in addition to those guest workers who have been sent home. Certainly the Government hike in payroll taxes has not helped the situation.
The recent blanket ban on work permits, approved by Cabinet, for masons, carpenters and landscapers is likely to hurt small contractors more than large ones. While abuse of immigration rules by contractors is totally unacceptable, it should be recognized that such abuse was permitted by the same ministry that is now taking draconian and undifferentiated action against them. It is our view that the Government’s failure to understand the conditions and practices in the industry caused this extreme swing in policy. This heightens uncertainty – the biggest enemy of business – and consequently dampens business investment, activity and ultimately reduces jobs available to Bermudians.
The payroll tax hike plus the unpredictability in government policies has made the situation for the construction sector – businesses and workers alike – worse than it need be.
Public Finance
One of our longstanding concerns with the Government and this Finance Minister in particular has been their failure to prudently manage the public purse. We have been critical of many things, from their failure to plan for recession to the unprecedented rise in public debt, to reckless spending that wasted hundreds of millions of tax dollars that, consequently, are not available today to support much needed job creation projects.
In answer to Parliamentary Questions in the Senate a few months back, the Government revealed that its Current Account balance had deteriorated more than it estimated, resulting in a deficit of $67 million instead of the $53 million it had estimated for the fiscal year that ended on March 31, 2010.
Now the budget for the current fiscal year anticipates a $67-million surplus. That requires a positive swing in the Current Account this year of $134 million – $34 million more than would be generated by the Government’s tax increases. The yield frm those increases is likely to be less than hoped for because of the lower number of persons employed in the economy. And that’s not taking into account interest and the replenishment of the sinking fund, which the Finance Minister is committed to do. That $67 million surplus is a very tall order indeed. I’m not holding my breath.
So it looks more likely Government will have to borrow more money just to run the government for this current year – and that’s not even taking capital projects into account.
In the meantime, the Government has increased the debt service by floating that $500 million bond. Public debt, in other words, is still on the rise.
Cost of Living and Unemployment
The good news is that the rate of increase in the cost of living – the inflation rate – remains relatively low. The bad news is that the actual level of the cost of living in Bermuda remains very high, one of the highest in the world. Combine this with the increasing scarcity in jobs, you have a wicked brew: a combination of the worst of both worlds.
In most poor countries with high unemployment, the cost of living (read survival) is low, so if you can get a small hustle you can survive. In Bermuda, unemployment is rising but the cost of survival is still staggeringly high. Even with a small hustle, it’s hard to make ends meet. The poor (working or unemployed) always suffer the most in a slow economy. This is why it is crucial for the Government to demonstrate prudent, thoughtful and responsible stewardship of the “common wealth” during such times.
Conclusion
With the US economy looking wobbly, the insurance/reinsurance sector still under a cloud of uncertainty back in Washington, no engines for new growth are about to roar to life. The increase in taxes by the Government is making a bad situation worse, taking money directly out of workers’ pockets. In addition, if we don’t get a grip on this crime situation we will inevitably see declines in future business activity.
Bermuda will continue to try to make the best of an unfavourable situation until these key factors change. Some are within our control, some are not. So far, as a country, we have shown little mastery over those factors within our control. We can make progress against them while steering our way through the continuing challenges from abroad, but it will require steady, astute and realistic leadership. We’ve not had that in recent years, but we have faith Bermuda can make up for it.
Mr. Richards leaves out the biggest threat to the Bermuda Internatinal Business sector and that is the attack on “tax avoidance” by countries around the world.
This is a major plank in the business model of International Business in Bermuda.
Why does he choose to ignore this?
Its funny that ole Bobby Boy decides to drop this supposidly bombshell on the people while trying to discredit the PLP family, but if you take a gander at the article below this one on the home page you will see S&P’s reversal of the islands creditworthiness from negative to stable. Thus dispelling any bad thoughts one might obtain form reading or listening to his advices.
We aren’t that stupid Bobby Boy!