As the year draws to a close, commentator Nathan Kowalski gives his assessment on the state of the economy in Bermuda.

The first two quarters of reported GDP in 2015 were comforting with real GDP growing 1.8 per cent. We expect, based on recent data, that 2015 will finally herald a year of overall positive growth for Bermuda.

The monthly Consumer Price Index (CPI) continues to point to a stable rate of inflation in Bermuda, under 2 per cent. The August CPI came in at an annual pace of 1.4 per cent, which is the lowest monthly reading since November 2013, driven by lower fuel prices. Core CPI, calculated excluding food and energy, was up 1.8 per cent.

Both retail sales and retail volumes remain positive after improving earlier in the year. Trailing 12-month retail volumes have risen 1.8 per cent through August compared to the prior period and trailing 12-month retail sales are up 3.8 per cent. Strong gains in auto sales offset declines in fuel sales, primarily due to lower gas prices. Most other retail categories are showing modest growth. It appears that freight and retail sales volumes are moderately above our expectations. We have now seen 12 straight months of retail sales increases. Inbound container volumes have increased 4 per cent year-to-date. Refrigerated container imports rose 9.9 per cent in the latest three months (through November) which may indicate that the Island’s population is now growing after contracting for the past five years.

Over the past six years one of the major drags on the economy has been a turn in the credit cycle. At this stage we believe that the short- and long-term credit cycles within Bermuda have improved. In fact we still believe public credit contraction (public) will exert a slightly negative 1 per cent tax on growth in the near-term but private sector deleveraging should be nearly complete and may offer an offsetting positive credit impulse.

The tourism sector in Bermuda continues to struggle. Bermuda Tourism Authority data up to the end of November does not point to any significant recovery. Air arrivals have fallen 0.5 per cent year-to-date for a total of 133,766 air visitors up to November (134,474 in 2014). At this stage, tourism is more important to government revenues than it is to the economy in terms of GDP. The number of jobs that tourism supports is also more important than their contribution to the economy. In addition, according to the recent Tourism Satellite report, residents actually now spend $12 million more on foreign travel than visitors spend on our tourism product. Essentially what used to be a net export and source of foreign earnings is changing.

Bermuda international business (IB) employment income remains steady despite significant headwinds in the insurance sector. This does not mean that the soft reinsurance market is over and industry consolidation will likely continue. Besides weak pricing, the industry also faces challenges from foreign currency translation and low interest rates. This follows six years of rationalisation in the sector after the financial crisis. Despite these changes the IB income data does show modest growth of 1.7 per cent in the sector to the end of the second quarter of 2015.

Bermuda experienced the first annual improvement in the number of IB jobs in six years according to 2014 government figures. We expect that IB jobs will be flat this year as reinsurance job losses will be balanced with some growth in speciality insurance and ILS employment. Bermuda’s leading position in the ILS market adds new potential for growth which will offset some of the job losses in the traditional reinsurance sector. In November, Bermuda was awarded full equivalence under the EU Solvency II regulations by the European Commission, which should strengthen the Island’s position in the insurance industry and may attract new business. Solvency II equivalence has been a huge confidence booster as a failure here may have led to a flight of jobs.

From 2008 to 2014 the Bermuda economy shrank 18.1 per cent from $5.65 billion to $4.59 billion. Looking at 2015 we are encouraged to see both retail sales and freight data pointing to growth, driven partially by the America’s Cup World Series and the build-up to the main AC event in 2017. Despite exiting recessionary territory we expect a continued slow economic recovery on the Island for 2016.

New hospitality projects present a potential upside to our economic growth forecast, while increasing consolidation in the reinsurance industry and the subsequent job losses poses as potential downside factor.

A major detractor from confidence continues to be the government’s overall indebtedness which amounts to about $5.75 billion (assuming the midpoint of unfunded liabilities estimates for public pensions and government health insurance schemes) or over 100 per cent of GDP.

Nathan Kowalski CPA, CA, CFA, CIM is the chief financial officer of Anchor Investment Management Ltd