Some encouraging signs
August 23, 2013
You might have though earlier this week that the economy and tourism were continuing to decline, given some of the gloomy reporting on tourism and the state of the economy. But hidden in those announcements was quite a lot of good news, which as some Government officials have belatedly stated, suggest that the economy is beginning to recover, albeit slowly. Some caveats are needed in this. One quarter's small improvements can easily be reversed and it would not take much to reverse the trend. But, for the first time in a long time, there are some encouraging signs.
The report on visitor arrivals said air, cruise and yacht arrivals were all down between April and June. But it's not the number of visitors who come to Bermuda that matters, it's the amount of money they spend. And there was good news there. Average length of stay — how many nights the average visitor stayed in Bermuda — jumped from 5.86 nights to 7.41 nights in the April to June quarter, a 30 percent increase. If those numbers are translated into bednights, it means that air visitors spent 570,000 nights in Bermuda in the second quarter compared to just under 440,000 in the same period in 2012. If those visitors spent an extremely conservative $100 a night on accommodation, then that means $13 million more was spent by them in the period — on rooms alone. If they spent $50 a day on food and transport (easily done), that's another $6.5 million.
These are good numbers and they are very conservative. The drop in spending by cruise visitors will offset some of the increase, but the likelihood is that overall, tourism spending has increased. According to Tourism Minister Shawn Crockwell, these changes are continuing in this quarter, so there is reason to believe that this will contribute positively to the economy. This is not the only positive news. The economic figures which were publicised on Monday also contain some numbers that suggest the economy is, finally, beginning to recover.
The Government's payroll tax incentive for new Bermudian hires has resulted in some 226 new jobs, even though it is not as far-reaching as it could be. To be sure, there have been job losses in banks and reinsurance companies at the same time, and those are just the ones we know about. But there is a sense that these are beginning to bottom out. Many companies have now cut payroll as far as they can. That's borne out by the increase in employment income and payroll tax receipts recorded in the first quarter; that suggests employment is rising, albeit very slowly. There will be some job losses in construction as well — as the Waterloo and hospital projects come to an end. These will be offset to some extent by the work at Pink Beach and the Fairmont Hamilton Princess. We also have to remember that construction is a consequence of economic growth where we have tended to look at is as a driver of the economy. There is little value in building if there is no one to fill the space; just look around Hamilton and Grand Atlantic for evidence of how “build it and they will come” works as an economic theory.
What is more encouraging is that new company incorporations are on the rise and recorded their highest levels in several years. For Bermuda in particular, growth begins with new incorporations, so this is a positive sign. Some of these businesses will have a very limited presence in Bermuda, but others will have staff and over time, they will grow if the environment is right. The spike in insurance registrations is also encouraging. Many of these will be insurance linked securities which do not create jobs in the same way that regular insurers do, but the rate of increase is positive. One of Government's jobs is to ensure that there is a healthy environment for growth in the private sector and that companies form here which will generate economic growth. This includes insurance, but we need to look further afield as well. The Bermuda Business Development Council and the Ministry for Economic Development are already looking to expand businesses like shipping, trusts and investment funds but those efforts need to be redoubled, while other sectors, including banking, should not be dismissed.
To get these businesses to come here and to expand, as well to encourage new tourism developments, Bermuda needs to be more competitive. At the moment, we give tax incentives and tax breaks to struggling sectors of the economy like tourism and retail. But Bermuda as a whole would be better off if we made the whole economy more competitive by reducing our very high costs. This is not easy, but Government can take a lead by reducing payroll tax — suggested this week by the Progressive Labour Party — and Customs duty. Of course, Government still needs revenue, so reducing these taxes needs to be done in a measured way — enough to encourage sufficient new employment and imports so that overall revenue is either unchanged or even increases. It can be done, although enormous care must be taken. Cut too little and you fail to have a meaningful effect on competitive. Cut too much and you reduce taxes so far that you can't make it back up. But if you find the right level, you can reduce overall costs and make Bermuda more competitive as a result.
The banks can help here as well. In good times, when risk was apparently low, credit was easy to obtain and contributed to the overheating of the economy and the real estate bubble that we are still paying for now. In hard times, risk is perceived as being higher and credit is hard to get. But a moderate reduction in interest rates now (while land and building costs are low) would ease the strain on borrowers and would lead to new business generation. In the end, Bermuda's economic malaise is partly driven by external factors, including the ever present threat of tax changes, but the cure lies here, in adapting to changing circumstances, promoting our strengths and reducing our weaknesses, especially the high cost of doing business.
The Finance Ministry is holding to its prediction that the economy will either be flat or will shrink slightly this year. That's prudent, and a welcome change from the overly sunny predictions of the recent past. But if the good news that has begun to come through continues, then Finance Minister ET (Bob) Richards may have the happy task of saying that those forecasts were too pessimistic.
City of Hamilton