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Bermuda’s statistical summertime madness

A flurry of statistics has hit the wires over the last month. The data dump comes in the middle of summer when most would rather be hitting the beach and not the keyboard for inputting data into spreadsheets. I'll hit the keyboard for you. What follows is a brief commentary on a few of the recent reports.

Labour Force Survey

In short, it wasn't good. Although the headline drop in the unemployment rate from 9 per cent to 7 per cent would seem to paint a positive picture, the underlying aspects were not favourable.

It looks like the entire “gain” in the unemployment rate is due to the fall in the labour force, i.e. there was a decline in unemployed workers of 984 people, which corresponds to the 1,133 drop in the overall labour force.

So what happened? Well a few things could have happened:

1) 1,133 workers suddenly died.

2) 1,133 workers retired and removed themselves from the labour force.

3) 1,133 workers left the Island.

4) 1,133 are “marginally attached” or have essentially given up looking for work for now.

What is likely, however, is a combination of all the four above.

Typically, a very constructive and healthy labour market involves the following:

1) The participation rate is rising (it's not; it's falling)

2) Hours worked are rising (they're not; they're falling)

3) The total number of filled positions or jobs is rising (it's not; it actually fell 150 positions)

The median wage did tick up but this simply means that for those fewer people working, they are making more in median terms (queue the inequality debate).

Bottom-line: the headline drop in the unemployment rate is masking the underlying dynamics of the labour situation in Bermuda, which are not as positive as may be expected. Are we at risk of a jobless recovery? I don't really think so, (as jobs will flow after more investment) but for now the job market still needs improvement.

Balance of Payments (BOP)

The current account surplus increased $33 million in the first quarter of 2015. The increase in the current account surplus mostly reflected an improvement in the primary income surplus due to increases in employee compensation which correlates well with GDP (see below). The large drop in energy prices has helped improve the imported goods position by $10 million. This year-over-year benefit of lower prices will begin to wane as we come near the end of 2015. A small commentary in the report states “Imports of clothing, food, and basic materials also contracted during the period”. This would normally suggest domestic activity is weak but it doesn't really jive with the strong series of retail sales we have seen so far this year, nor the slight uptick we are seeing in freight.

The positive current account surplus is a major plus for Bermuda in a number of ways. The surplus helps achieve stability in our peg to the US dollar.

Positive terms of trade or a surplus also assists in our potential to reduce debt. The following accounting identity helps explain this:

Private Debt Reduction + Government Debt Reduction - Trade Surplus = 0

So with a good trade surplus (or current account balance), you can proceed to reduce private sector debt and even government debt. Without a trade surplus things become more difficult. Bermuda has good potential here.

Q1 2015 Gross Domestic Product (GDP)

First quarter GDP was commendable. Real GDP grew 2.2 per cent (second highest reading in six years). It's worth noting, however, that in the prior five years, when Q1 did record positive results, the year still ended in negative territory. I suspect from recent data, however, that Q1 will finally herald a year of overall positive growth for Bermuda.

The main engine of growth was the export sector. In fact this was really the only engine. All other components fell in real terms. The 12.4 per cent surge in net trade was mainly due to the huge jump (+22 per cent) in the export sector. The largest component of this increase was the jump in exports of services (think international business) of some $32.5 million. Part of what correlates with this is employee compensation (when you look at the BOP we saw an uptick of about 7 per cent.)

A couple aspects to also chew over:

1) Consumption (which is the largest component of GDP at about 63 per cent) would suggest the “domestic” economy is stabilising but not really improving. This is again at odds with the retail sales stats which are portraying a much more robust recovery (2 per cent vs. 1 per cent nominal GDP consumption growth). We aren't likely to see much help from Government as it continues to try and balance the budget. End demand will need to be seen from households which would improve with a growing labour force and more jobs. I'm not sure whether we have yet seen the bulk of the effects from the reinsurance consolidation on the job department, so it will be interesting to see how Q3 and Q4 shape up on the consumption front.

2) Investment (gross capital formation) continues to fall. The big delta here comes with new hospitality development. The commencement of a significant project will help turn the momentum in a positive trajectory and the mechanism of jobs leading to consumption leading to more jobs can't be understated.

Overall, the economic landscape in Bermuda is improving but we are still being fed mixed messages. Employment continues to stagnate while growth does appear to be stabilising-to-improving slightly. Overall, I suspect 2015 should turn out to be the first year of positive growth for the Island in six years.

Nathan Kowalski CPA, CA, CFA, CIM is the chief financial officer of Anchor Investment Management Ltd and can be reached at nkowalski@anchor.bm

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Published August 17, 2015 at 9:00 am (Updated August 16, 2015 at 8:51 pm)

Bermuda’s statistical summertime madness

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