Going in the wrong direction
For those who don’t follow these things with the avidity of a football fan during a World Cup, Jason Hayward announced last week that GDP had shrunk by 1.7 per cent in real terms compared with the same April to June period in 2021.
The reason, the Minister of Economy and Labour said, was because this year’s higher inflation had eroded growth. Before taking 3.9 per cent inflation in the period into account, the economy had grown by 2.2 per cent.
Mr Hayward also maintained that although the figures were seemingly unimpressive, Bermuda remained on a growth trajectory. This seems to ignore the truth that 2.2 per cent growth is pretty anaemic.
But the minister suggested better news was to come because imports had increased to pre-pandemic levels during the period. He suggested this meant that as those goods were sold or used in construction, they would drive growth.
This seems logical on its face. But two factors suggest it may not be.
The first is that imports were even higher in the second quarter of 2019, but this was followed by two quarters of contraction as Bermuda slipped into a mini-recession, so high imports in one quarter does not necessarily lead to growth in the next.
The second is that inflation will be even higher in the third quarter at 4.5 per cent or more, meaning that it will be even harder for the economy to grow in real terms.
The elephant in the room was raised by Bermuda College economist Craig Simmons and economics gadfly Robert Stubbs, who both identified Bermuda’s chronically low levels of investment as the root cause of the island’s economic doldrums.
As the chart below shows, Bermuda’s “gross capital formation” or capital investment has been basically flat since a slight surge in 2019 when construction of the St Regis and the new airport were at their height.
What this means is that since 2019, there has been little investor confidence in Bermuda.
Clearly the pandemic and its related lockdowns had an effect. After the pandemic, it would have been reasonable to expect a surge, as there was globally, but investment has remained flat.
As Mr Simmons noted: “Investment spending matters because it determines a country’s growth potential. Too little and growth prospects fade because we haven’t channelled enough savings towards maintaining, replacing and upgrading our machinery and equipment.”
He added: “Expectations drive investment spending. If entrepreneurs and property developers perceive a rosy future, they are more likely to buy the machinery and equipment necessary to realise their expectations. Fear of recession and uncertainty over government policies work in the opposite direction.”
Investors need confidence in the future to invest. That is true whether it is a person building a house, a business owner thinking about expanding sales space or adding new equipment, an international company considering expanding or a hotelier considering whether to renovate a hotel.
The message of the GDP figures is that confidence in Bermuda is not growing and may well be falling, as the graph suggests.
Why should that be? Certainly, global factors play a part. The war in Ukraine and supply chain problems as a result of Covid-19 have driven up prices at a rate not seen in 40 years. Inflation is a great cause of uncertainty if you don’t know what prices will be in six months.
In part because of Ukraine and the various energy shortages, the world is also teetering on falling back into recession, which again causes uncertainty.
So far, so bad. Add in the knock-on effects of global interest rates increases which directly impact local rates, and confidence becomes even more weaker.
But Bermuda should be in better shape than it is to weather this.
International insurance is in reasonable shape, helped by a long overdue hardening of prices. And the life reinsurance business continues to quietly and steadily grow.
Tourism, Bermuda’s other economic pillar, should be in stronger but remains hamstrung by delays in the renovation of the Fairmont Southampton Princess.
Those delays suggest at least part of the problem. According to owner Gencom’s website, it is closing deals and moving forward on developments elsewhere, but cannot seem to get its deal completed in Bermuda.
This suggests a lack of confidence by Gencom on the one hand and an inability to get the deal done by Bermuda on the other.
This failure to complete is becoming a contagion in Bermuda. With the pandemic waning in 2021, the Government announced a series of stimulus projects aimed at getting the economy moving again.
A total of 31 projects were announced initially, which was too many for any kind of focused approach.
These were then wisely whittled down to four, including the refurbishment of the Tynes Bay Incinerator; the development of vertical farming; the development of Uptown Northeast Hamilton; and the development of the casino Industry.
Of these projects, the incinerator will take several years to complete, the vertical farming project is “paused” because the Government’s overseas partner is in financial difficulties and has been for some time as a simple Google search shows, and the development of Uptown Northeast Hamilton will take years.
Only the casino project seems to be making any progress but it is still not clear if and when either the St Regis or the Hamilton Princess will actually open their casinos.
None of the projects, nor most of the other 27 identified, are bad ideas in their own right. But what they show, like the proposed fish processing plant and the proposed electricity plant suggested for St David’s, is that the Government is taking the wrong approach to economic revitalisation.
Perhaps because the pandemic showed governments had a more interventionist role in society and the economy than had been generally accepted previously, the Government decided that it should also take a more active role in the economy.
This is utterly wrong. What these projects demonstrate, along with the still meandering venture into fintech, is that governments are by definition bad at picking winners and losers in the commercial sector, and are ill-suited to driving them to completion.
That does not mean that the Government has no function in economic policymaking.
Nothing would give investors confidence in Bermuda more than a sense that the Government wanted to encourage its growth and success and has established the framework for that success. This is the secret to Bermuda’s success in reinsurance, yet the Government seems unable or unwilling to bring the same approach to the rest of the economy.
This is not an invitation to laissez fair dog-eat-dog capitalism; the Government should ensure the vulnerable are protected and encourage equal opportunity and competition.
And it can also use both persuasion and other means to encourage innovation and entrepreneurs. To that extent, the guarantee for first-time mortgage applicants is to be welcomed since the banks have failed to be as supportive as they should be.
And investors need to be encouraged to support small and medium enterprises, which are too often starved of capital.
But encouraging this kind of enterprise is not the same as investing in it. The Bermuda Economic Development Corporation’s investment in vertical farming is the proof of this folly.
For many, population growth is the key to economic growth, but this is not entirely accurate. If Bermuda encourages growth and enterprise, then jobs will come.
What is needed then is for the Government to encourage that growth, and where qualified Bermudians are not available, to make it easier to hire non-Bermudians who in turn will generate the economic activity Bermuda so desperately needs and has not had for more than a decade now.