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Tough year ahead

Tony Best

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“A severe deterioration of its macroeconomic stability.”
That’s what the World Economic Forum said Barbados suffered in recent times. The major cause was clear: “the decline in tourism resulting from the (global) economic downturn has had a serious negative impact on the island’s general economy as well as on its public finances in recent years.”
The International Monetary Fund agreed but put it differently last month.
“The difficult global economic conditions continue to pummel Barbados with growth at anaemic levels and inflation and unemployment rates moving up sharply,” the fund declared three months ago.
Combine those assessments and the result would explain why Standard & Poor’s, the prominent Wall Street sovereign credit-rating firm in New York, isn’t ecstatic about Barbados’ outlook and credit for 2012.
S&P, which downgraded the United States’ rating last year, has virtually put Barbados on notice that its credit rating, once among the highest in the developing world, could plunge to junk bond status this year. Should the decline occur, it would be a psychological jolt for Barbadians and a costly development for the Stuart administration, should it be forced to return to the capital market for foreign loans.
Most indicators point to an extremely tough year for Barbados and its Caribbean neighbours. Factors influencing the pessimism include the already high unemployment rate – more than 12 per cent, up from 6.7 in 2007; escalating inflation that stood at 10.6 per cent in August; and what the IMF described as “subdued” domestic activity. But major drivers behind the dim outlook is what’s happening in the United States and Britain, and how the domestic economy is being managed.
Take the case of the United States: a spate of good economic news in the fourth quarter culminated on Thursday with a slight decline in the jobless rate. It fell to 8.5 per cent from 8.7 per cent after the labour market benefited from 200 000 more jobs in December.
It was the sixth consecutive month that the economy added at least 100 000 and the figure may be adjusted downward, as payroll-processing firm ADP said there was an even larger job gain in the private sector, 325 000 instead of the 200 000 jobs Washington reported.
But the good news doesn’t end there. Positive indicators suggest that the United States may be in for the fastest and strongest economic growth since 2009. With construction of new residential homes surpassing expectations, consumer confidence on the rise, the stock market moving steadily ahead, manufacturing picking up, and small businesses performing better, economists expect growth to be in the two per cent ballpark this year.
If President Barack Obama and the Democrats are able to secure an extension of a US$150 billion payroll tax cut for 160 million wage earners, the occupant of the White House may renew his mandate and have four more years in the official residence.
But a warning is being sounded. The prolonged European financial crisis is throwing a damper on the United States and threats from the Republicans in Congress to ignore calls for the extension of the tax cut can slow down economic momentum.
“Unfortunately, I think we’re going to see a slowdown over the course of next year,” warned Ethan Harris, a head of Bank of America’s global research unit.   
“Not only do we have the European crisis spilling over and hurting American trade and confidence,” but there is the spectre of homegrown economic “shocks” caused by political maneuverings on Capitol Hill.
Next is Britain. With the IMF forecasting a sluggish 1.6 per cent growth, the ongoing European crisis taking a heavy economic toll on Britain; the jobless rate stuck around eight per cent, the highest in more than a dozen years and a dearth of export orders looming on the horizon, it stands to reason that the Economist magazine would warn that if “the past year was a rotten one for Britain’s economy, 2012 will feel worse.”
Less than encouraging results in Britain and the United States spell trouble for Barbados which receives most of its visitors from there. The flow of tourists wouldn’t rebound significantly and foreign direct investment could remain in the doldrums, almost guaranteeing a rise in Barbados’ jobless rate, more strain on Government finances and higher Government debt, which now stands at 117 per cent of gross domestic product – a 27 per cent jump in two years.
Yet all may not be lost. The nation’s banking system that’s inextricably linked to Canadian banks was “stable and healthy,” noted the IMF. But that’s being offset for the most part by the persistently high budget deficit and a low national savings rate, all of which are “weakening the future capacity of the country to undertake the necessary investments to boost” Barbados’ competitiveness, warned the World Economic Forum.
“Not withstanding these weaknesses, Barbados can still leverage its strengths in terms of its stable, transparent and reliable institutions, high quality infrastructure and excellent educational system.” said the World Economic Forum.
Of course, there is considerable uncertainty about the Government’s handling of the CLICO mess, which the IMF believes should be resolved by a “private sector solution”.