THE GLOBAL PICTURE
IT HAS become known as the “Great Recessionâ€, the year in which the global economy suffered its deepest slump since the second world war.
There has been much collateral damage.
Average unemployment across the OECD is almost 9%. In America the jobless rate has doubled to 10%.
The Great Recession could have become a Depression. The biggest, broadest and fastest government response in history avoided that outcome. Teetering banks were wrapped in a multi-trillion-dollar cocoon of public cash and guarantees. Central banks slashed interest rates. Many Governments worldwide embraced fiscal stimulus with gusto. This extraordinary activism helped to stem panic, prop up the financial system and counter the collapse in private demand.
Stable but frail
So much for the good news. The bad news is that today’s stability is worryingly fragile both because global demand is still dependent on government support and because public largesse has papered over old problems while creating new sources of volatility. Property prices are still falling in more places than they are rising, and, banking stresses still persist. Strip out the temporary effects of firms’ restocking, and much of the rebound in global demand is thanks to the public purse, from the officially induced investment surge in China to stimulus-prompted spending in America. That is revving recovery in big emerging economies, while only staving off a relapse into recession in much of the rich world.
Demand in the rich world will remain weak, especially in countries with over-indebted households and broken banking systems. For all the talk of deleveraging, American households’ debt, relative to their income, is only slightly below its peak and some 30% above its level a decade ago. British and Spanish households have adjusted even less, so the odds of prolonged weakness in private spending are even greater. And as their public-debt burden rises, rich-world governments will find it increasingly difficult to borrow still more to compensate. The contrast with better-run emerging economies will sharpen. Investors are already worried about Greece defaulting, but other members of the euro zone are also at risk. Even Britain and America could face sharply higher borrowing costs.
Big emerging economies face the opposite problem: the spectre of asset bubbles and other distortions as governments choose, or are forced, to keep financial conditions too loose for too long. China is a worry, thanks to the scale and composition of its stimulus. Liquidity is alarmingly abundant and the government’s refusal to allow the yuan to appreciate is hampering the economy’s shift towards consumption.
Walking a fine line
Whether the world economy moves smoothly from the Great Stabilisation to a sustainable recovery depends on how well these divergent challenges are met. Some of the remedies are obvious. A stronger yuan would accelerate the rebalancing of China’s economy while reducing the pressure on other emerging markets. Credible plans for medium-term fiscal cuts would reduce the risk of rising long-term interest rates in the rich world. But there are genuine trade-offs. Fiscal tightening now could kill the rich world’s recovery. And the monetary stance that makes sense for America’s domestic economy will add to the problems facing the emerging world.
That is why policymakers face huge technical difficulties in getting the exit strategies right. Worse, they must do so against a darkening political backdrop. As Britain’s tax on bank bonuses shows, fiscal policy in the rich world risks being driven by rising public fury at bankers and bail-outs. In America the independence of the Federal Reserve is under threat from Congress. And the politics of high unemployment means trade spats are becoming a bigger risk, especially with China.
Add all this up, and what do you get? Pessimists expect all kinds of shocks in 2010, from sovereign-debt crises (a Greek default?) to reckless protectionism (American tariffs against China’s “unfairâ€ currency, say). More likely is a plethora of lesser problems, from sudden surges in bond yields (Britain before the election), to short-sighted fiscal decisions (a financial-transactions tax) to strikes over pay cuts (British Airways is a portent).
Extracts from The Economist
17 December 2009
THE BARBADOS PICTURE
The public finances of Barbados have already experienced some of the impacts of falling FDI, low remittances, fewer tourists spending less, postponed or cancelled real estate projects and shrinking tax revenues as demand and consumer spending weakened.
Unemployment has risen to around 10% with a lot of upward pressure. The National fiscal deficit and Debt to GDP ratio are too high and must be reduced to avoid a further downgrade in our sovereign debt rating.
The slow and jobless “recoveryâ€ in the USA, UK and Canada in 2010 and beyond and the potential for further shocks will create many more challenges for Barbados and the Caribbean.
Weak demand from our traditional markets will continue (because of weak consumer spending). Visitors will demand more value for less money. Property values will fall further as international buyers look for bargains. The gold rush days fueled by cheap plentiful finance are gone for now. Domestic property values will also be stressed as lower personal incomes (wage freezes, fewer bonuses etc), inflation (utilities etc) and higher taxation weaken the consumers’ ability to spend.
Protection of the Foreign Exchange Reserves will be a priority. The commitment to a fixed and stable rate of exchange is at the heart of all public finance policies. A focus on earning more foreign exchange is essential.
The priorities now are:
1.Repair Government’s Finances (balance the budget and reduce the National debt).
2.Stimulate private sector investment in the export growth sectors.
Government’s next policy responses should include:
-quick reduction of Government expenditure and strategies to eliminate duplications and silos and wastage of scare resources (extravagance and discretionary spend must be eliminated);
Objective-improved international reputation for sound fiscal management.
-immediate strategic, structural reform of the Public Sector is essential to deliver better value, high quality Government services that build public confidence and facilitate private sector investment at a quicker pace thus driving investment;
Objective-create the best Civil Service in the World known for its intelligence and operacy and for effective business facilitation.
-fast tracking the development of new indigenous export services industries through Entrepreneurship Development;
objective-export growth,job creation,new home-grown industries,creation of an entrepreneurial culture.
-adopt a package of innovative immigration policies to attract FDI(especially from the UK and Canada now) that will bring skills and international market knowledge transfers in strategically selected indigenous services exports sectors(multi-media,medical,sports,education,private wealth management,international sales and marketing,arts/culture,film,music,fashion,R&D,professional and consulting.
This approach will fast track development of key export sectors and assist in the Entrepreneurship drive through JVs and alliances.
This will also help the real estate sector.
Objective-FDI, skills transfers and export market penetration.
Higher taxation is not an option that makes sense now.
It will hurt private sector job creation at a time when that is where jobs need to be created the most for sustainability.
Successive Governments in Barbados have favoured Public Sector job protection at the expense of true economic restructuring that will make the economy more competitive and deliver sustainable growth. Now is the time to change. We missed the boat in 1991 and 2001.
The reality is that our National Balance Sheet and P&L need to be fixed soon.
Far more important however is to build an economy for the new age.
We can do nothing about external market forces which will remain unfavourable for at least 2010 but maybe much longer depending on the outcome of the huge but unsustainable Government fiscal stimulus policies in the USA and UK.
In June the UK elects a new Government. Post-election policies most likely will lead to higher taxation and cuts in Government spending there. This will make market’s conditions in our most important market even more difficult for us.
Belt tightening time is here.
There is a need for great leadership and wisdom at the level of the Social Partnership.
Opportunities abound for Barbados in a Global Economy but we need to plug a few holes in our boat and re-focus our resource allocation strategically and become more competitive.
More exposure to global markets is the best tonic. This will drive innovation and entrepreneurship. Protectionism where it exists should be eliminated.
Rapid wealth creation will happen when we Â engage the world at ever level of the economy. Sufficient wealth to meet the public’s expectations cannot be created by serving only the domestic market.
Its time to move to another, higher level of National performance and really engage in global trade.
Peter N. Boos FCA
Ernst & Young Caribbean
21 December 2009