On October 19 the Governor of the Central Bank of Barbados provided the public with an update on the progress of the economy out of one of its longest recessions in the island’s history. A number of key points came out of the document.
Some growth in real economic activity is expected in the fourth quarter of the year. Since 2008, the Barbados economy has been contracting.
The Press release notes that real GDP in 2010 is projected to fall by one half of a percentage point.
Given that up to the third quarter the cumulative decline in economic activity was estimated at less than one per cent, some expansion in economic activity in the fourth quarter would need to be realised to make the prediction of a half of a percentage point a reality.
Potential growth
One industry that was highlighted as a potential source of growth was tourism. The cumulative expansion in real value-added of tourism over the January to September period was estimated at three per cent, and the fourth quarter is also anticipated to show growth.
This comparatively strong expansion in tourism, however, is now likely to make a significant impression on the unemployment rate, as job growth tends to lag any expansion in economic activity.
Inflation seems to be trending up. For most of 2009, inflation on the island was on a downward path. Since April 2010, however, inflation has trended upwards: for the 12-month period ending July inflation was estimated at five per cent compared to 3.7 per cent at the end of December 2009.
Should this trend in inflation continue, it is quite likely that inflation by the end of 2010 could reach about seven per cent.
There has been some evidence of fiscal adjustment. The Governor’s statement notes that most of the major categories of Government spending declined over the period. Indeed, Government spending as a proportion of GDP during the third quarter was at its lowest level since 2008.
Direct tax
Unfortunately, the direct tax take offset most of the gains arising from the declines in government spending. Corporate tax receipts, in particular, were down by almost $87 million.
One positive fiscal sign was that VAT receipts over the January-August period in 2010 were up on the similar period of last year.
Given that expenditure cuts have not been as successful as expected with regard to bringing the fiscal deficit down to sustainable levels, some additional adjustment on the revenue side might be necessary.
