Five reasons why the economy can grow in 2015
Bermuda goes into 2015 with better economic growth prospects than at any time since the global financial crisis struck six years ago.
After a grim period marked by job losses, wage cuts and freezes, business closures, a severe property market slump, the departure of thousands of overseas workers and a government plunging ever deeper into debt, the economy has shown signs of stabilising over the past year.
As we head into the new year, a combination of potential growth catalysts suggest that a warming of Bermuda’s economic climate may be coming.
Could 2015 be the year of long-awaited return to growth?
1. New hotel projects
There have been many false dawns over the past decade or so as the Island has awaited new hotels that could add scale, modern quality and jobs to Bermuda’s tourism offerings. Grand plans have been floated and have come to nothing. Finally, it seems that work is really going to get under way — on several fronts.
By the end of this year, construction work should be steaming ahead all over the Island. The first phase of the new resort at Morgan’s Point — an 84-room boutique hotel and more than 140 residences — is exciting for the west. The Desarrollos Hotelco Group project to build a new $120 million hotel on the site of the old Club Med — due to start in May — will provide a huge boost for the east.
Add the $85 million Ariel Sands redevelopment and ongoing renovations at the Fairmont Hamilton Princess and the Pink Beach Club, and it’s fair to say the Island’s construction industry will be kept busy in 2015.
As if that were not enough, Government is also hoping for its plans to build a new $200 million aircraft terminal to get under way by the end of the year.
Gross domestic product breakdowns show the construction industry suffered five consecutive years of declining output by the end of 2013, but continues to provide around seven per cent of the Island’s jobs.
Consider that in 2013, the value of new projects started was $52.9 million, while the value of work put in place was $127.7 million. If all of the projects start on time, those numbers will be dwarfed in 2015. The construction rebound will be valuable socially, as well as economically. With an unemployment rate last officially measured at seven per cent, and young people particularly badly affected, the Island desperately needs the kind of blue-collar jobs that construction offers.
Construction workers’ skills will be in demand once more and developers will be anxious to complete their projects in good time for the 2017 America’s Cup, boding well for overtime opportunities and likely creating a need for foreign workers to bolster the local workforce.
Construction has been generating about $30 million per quarter in employment income since the start of 2013, according government statistics through June 30, 2014. That’s a far cry from the first quarter of 2009, when construction workers took home $46 million.
A return to those kind of numbers would benefit businesses of all kinds as much of the extra money circulated through the economy.
2. Cheaper energy
World crude oil prices fell by almost half in 2014 — a staggering capitulation that will act as an economic stimulus for Bermuda if the low prices persist. Brent crude ended 2014 trading at around $56 a barrel.
The benefits have already become apparent. The price of fuel at the pumps fell to its lowest point since 2010 in December. And electricity bills are falling too. Belco has set a 12 cents per kilowatt hour fuel adjustment charge for January 2015. Consider that in 2013, Belco customers paid out nearly $96 million in fuel adjustment charges, when the average rate for the year was 17.75 cents per kilowatt hour. The January 2015 rate is about one third lower than the average 2013 rate.
If the 12-cent rate were to continue throughout the year, the result could be a $30 million-plus bonus for the Bermuda economy. That’s a lot more disposable income in our pockets. While energy prices will be volatile, this very rough calculation illustrates the potential size of the effective stimulus for an Island burdened by some of the world’s most expensive energy prices.
3. The America’s Cup effect
The announcement in December that Bermuda had been selected as the venue for the 2017 America’s Cup was greeted with euphoria, not only by the sailing community. Government has estimated a $250 million beneficial impact for the local economy — and Economic Development Minister Grant Gibbons describes that as a “conservative estimate”.
The tangible benefits should start to accrue in 2015, as team members and their families come to Bermuda to start months of practising and a World Series regatta, one of the early stages of the America’s Cup, will take place here in October. Bermuda Tourism Authority chairman David Dodwell reckons the America’s Cup could add about ten per cent to air arrivals between now and the summer of 2017.
There may be intangible benefits too, such as confidence, an important ingredient in the economic growth mix. The feel-good factor may help to persuade people that they can believe in Bermuda’s future with more conviction, something that could tip the scales for some in favour of buying a big-ticket item such as a house or a car.
The dose of global publicity the Island will receive in 2017, as the main event is beamed to the world, may convince investors in tourism-related businesses to take the plunge in the run-up to the racing, and it will not do any harm to real-estate values either.
4. US growth
The United States is Bermuda’s major trading partner, the main source of international business investment and visitors alike. Its economy has made huge strides since the market meltdown of 2008. In the third quarter of 2014, its economy was growing at an impressive five per cent annualised rate. And although it’s unlikely to keep up that booming pace of growth, the experts expect US GDP to grow at its fastest rate in more than a decade in 2015.
Unemployment has fallen below six per cent, as the US economy delivered more than 200,000 new jobs per month in 2014. With interest rates still low and the property market continuing to improve, many Americans will be starting to feel better off than they have done in some time. US growth is good news for tourism and for international business.
The US is also the Island’s biggest insurance and reinsurance market and a growth in economic activity will translate into a growth of insurance exposures. However, a trend toward consolidation in the insurance industry, as has been seen with RenaissanceRe agreeing to buy Platinum and XL Group in talks to buy Catlin, could result in job losses in the industry.
5. Leaner and fitter
Many businesses in Bermuda — and their employees — have taken a heavy dose of pain during the recession. Hundreds have lost their jobs, while many more have taken pay freezes or cuts. Companies have streamlined their operations, removed dead wood and improved efficiency. The survivors are leaner and fitter.
The business landscape has changed. Even some slackly run businesses could thrive in the pre-crisis environment, but not so any more. Competition in many sectors has heated up and online entrepreneurs are flourishing. Advances in technology have lowered the barriers to entry. Added pressure has come from a decrease in the size of the market with the fall in population.
A more competitive local business scene has helped to make Bermuda more competitive viz a viz the rest of the world. The Island’s lack of resources, geographical remoteness and lack of economies of scale will always mean it is a relatively expensive place to do business. However, the fall in price of business basics, like commercial real estate rents and broadband internet connections, makes cost less of an issue than it used to be.
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- What will be the best way to create needed new jobs?
- Attract more international companies
- Grow the population
- Reduce the number of non-Bermudian workers
- Develop new business sectors other than international business and tourism
- Retrain the workforce
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