Better than expected
Normally a near two-percent contraction in the economy would be unwelcome news. But the fact the Gross Domestic Product for 2010 was projected to have declined by as much as five percent means that the figures released last week are grounds for relief, although hardly cause for celebration.
A two percent contraction does not feel very comfortable, to be sure, and the fact is that since 2008, the Bermuda economy has shrunk by some five percent in real terms and by around seven percent after inflation is taken into account. Because even a one percent contraction has a greater than one percent effect on the economy, and because the impacts of recession, including unemployment, tend to lag behind the actual contraction, it is no surprise that the effects of at least two years of recession feels worse than the actual numbers might suggest. For someone who has lost a job or a home, hearing that the economy “only” contracted by two percent does not give much comfort.
One of the problems of statistics like GDP is that they are backward looking, when what most people want to know is what is happening now and what will happen in the future. The brighter than expected figures suggest that the economy’s descent slowed in 2010 and improvements this year in tourism, international business’s relative stability and recent retail spending figures, which are only marginally below last year’s, suggest the recession may be bottoming out, even if it does not feel like it.
And a flat economy is no guarantee of future growth. The economy today is much smaller and less vibrant than it was in 2009 when the economy peaked. Growth, if there is any, is likely to be slow. The economy is exceptionally vulnerable to internal and external surprises as well. US and European economies are still in the economic doldrums and at risk of returning to recession, which would affect Bermuda. Internally, it will still take very little to knock confidence. If another international business laid off substantial numbers of staff or redomiciled, or another hotel closed, this would do severe damage. Despite the fact that Government seems to have finally recognised the need for more business-friendly policies, layoffs have continued and these will crimp any recovery.
One of the reasons for the better than expected GDP figure in 2010 was the improved performances of “financial intermediaries”, mainly banks, which bounced back from the disasters of 2009. That offset the collapse of the construction sector and continued weakness in international business. But there remains a high level of debt in the private sector, much of it based on real estate where rents and property values have dropped and show little sign of improving.
So far, with notable exceptions in the hotel sector, there have been few foreclosures or receiverships, but this could change as more businesses run through their cash reserves and banks pull the plug. In human terms, this would mean more home and job losses, as well as more wealth being taken out of the economy. In time, more business-friendly policies and efforts to diversify the economy may bear fruit. But a sustained recovery won’t occur until Bermuda becomes more competitive and productive. That will not happen unless Bermuda becomes less expensive compared to other domiciles, or is able to raise the value of the services it offers.
To some degree, that can be achieved as payrolls are reduced and companies become more nimble. But there’s no doubt that this will involve more pain.