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Is the Bermuda patient in recovery?

You may have seen the highly acclaimed television show “House”, which is based on a fictional Princeton Plainsboro Teaching Hospital in New Jersey. Dr Gregory House tackles potentially terminal health mysteries as would a medical Sherlock Holmes. His diagnosis is complicated and treatments involve trying different approaches.

Bermuda's economic situation can be compared to one of House's patients whose fate lies in the hands of an experienced team of experts. Unfortunately the cure is not a simple dose of antibiotics. Let's first make sure we are looking at the right diagnostic chart.

The “positive” growth in nominal gross domestic product (GDP) we saw last year is not what we should be focused on. The main difference between nominal and real values is that real values are adjusted for inflation, while nominal values are not. As a result, nominal GDP will most of the time appear higher than real GDP.

Nominal values of GDP from different time periods can differ due to changes in quantities of goods and services and/or changes in general price levels. As a result, taking price levels (or inflation) into account is necessary when determining if we are really better or worse off when making comparisons between different time periods. For example, having two per cent nominal growth when inflation is ten per cent would not be considered a good thing. The Bermuda patient was still fading last year.

The good news is it looks like there are a number of positive aspects that are offering a shot of epi. Let's consider a few items.

1. Storm Surge.

Gonzalo's and Fay's vicious double punch knocked the patient down BUT also offered medicine for revival. The surge and shot of reconstruction activity is a bonus for Bermuda and does offer some juice to the economy in the form of additional spending that would not have happened otherwise.

According to Boston based AIR Worldwide, Gonzalo caused estimated insured damages of between $200 million and $400 million in Bermuda. Much of this damage is reinsured outside of Bermuda, so in effect it offers a capital injection to the Island. But, let's not forget the “broken window fallacy”. Breaking windows reduces ones disposable income by the deductible that may have been spent somewhere else (albeit admittedly small in comparison to the dollar value of repairs). Moreover, replacing something that has already been purchased is a maintenance cost, rather than a purchase of truly new goods, and maintenance doesn't stimulate future long-term production. In the medical world they often call this the surge — a period where the patient recovers for a brief period only to relapse with dire consequences. Storm repairs do not offer any real sustainable avenue for economic growth. The storm also caused the loss of tourism revenues as many visitors either cancelled their trips to the island or shortened their stays.

2. Collapse in oil prices.

This is actually a very positive development that many Bermudians may not be aware of. Energy prices permeate almost all aspects of economic inputs, more so maybe in Bermuda. The collapse in crude oil from prices of over $100 to around $58 today offers a large “tax break” for Bermuda. Belco's future purchases of fuel should be dramatically lower which should eventually lead to a large reduction in the fuel surcharge levied on every power bill.

As a result power bills should drift lower over time giving all of us more disposable income. Furthermore, most goods have to be shipped to Bermuda and fuel costs are significant part of that expense. The Rhodium Group recently conducted a study in which they suggest that if this drop in energy prices persists, Bermuda's GDP will get a 1.1 per cent bump annually. This is very powerful medicine. You can thank US shale technology.

3. America's Cup 2017

Is this a cure or is this treatment for some symptoms? We have bought a drug for $77 million that could add economic benefits of $250 million and add an additional $14 million into the public coffers. This $250 million in economic benefits is actually extremely positive and essentially adds about three per cent to GDP per year over two years (assuming a fiscal multiplier of 1.28). This event essentially offers Bermuda a “call option”. If it is successful, the exposure and follow-on construction could substantially boost the longer-term economic dynamics of the Island.

It is an experimental drug that could help to cure the patient. The outcome, to be honest, is not known. Neither is how this windfall will be distributed or to whom it will benefit most. San Francisco's economic report (http://www.sfbos.org/Modules/ShowDocument.aspx?documentid=47894 ) shows an analysis of the impact of the 34th America's Cup to the city and offers some interesting things to consider.

The economic impact to the city amounted to only “27 per cent of the original projections” but did generate $364.4 million in economic impact to city businesses and residents, $5.8 million in tax revenue and 2,863 jobs (517 of which were local and included 65,508 work hours). Overall the city incurred a net cost of $11.5 million to host the cup.

It's too early to tell with any certainty how this will ultimately benefit Bermuda but the optionality suggests it could be a nice medium-term boost with a host of future longer-term options for an accelerated tourism product brought about by a renewed interest and international exposure.

4. Google?

This, in my opinion, is as close as we get to a miracle cure. Having a high-tech company establish an office in Bermuda would be a huge win and a true “game changer”. [The Royal Gazette reported last week that the search engine giant had been in talks with the Bermuda Business Development Agency about potentially bringing an operation here.] Events are nice but they don't necessarily offer sustainable economic growth or the huge benefits associated with having a company like Google set up an office on our Island.

Google moving here offers “bums in seats” and much needed diversification. Bermuda's secular issues and its “denominator problem” don't get fixed with one-off infusions. It gets fixed with growth in robust areas of the global economy that brings great paying jobs in intellectual capital to the Island. To move forward in the future you need to be part of the future. Although this miracle cure is still in Phase 1 clinical trials, its success offers a sustainable cure.

Right now Dr House has a few very promising treatment options for the Bermuda patient whose prognosis was rather grim. Some may work very well and offer at least a hope for a cure. Time will tell if these are just shots of epinephrine that revive the patient only to watch him slowly slip back in to a coma.

The key is focusing on the cure and not simply treating the symptoms.

Nathan Kowalski is the chief financial officer of Anchor Investment Management Ltd. The views expressed are his own. Anchor Investment Management Ltd is licensed to conduct investment business by the Bermuda Monetary Authority. Nathan can be reached via e-mail at nkowalski@anchor.bm

Dr Gregory House: He might see hope for a cure if his patient were the Bermuda economy

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Published December 15, 2014 at 8:00 am (Updated December 14, 2014 at 6:18 pm)

Is the Bermuda patient in recovery?

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