LEFT OF CENTRE: Grim outlook without action
Barbadian finance and Economic Affairs Minister Chris Sinckler said that Government would consider public sector layoffs only as a last resort at a Press conference in early May.
After seeing the public sector deficit widen substantially in the 2012/2013 fiscal year, Government has announced it would seek ways to close the budget gap. For the time being, however, Sinckler indicated that Government would pursue measures such as reducing waste, rationalising Government functions, and reducing duplication of tasks as the first order of business in controlling spending.
Unemployment in Barbados rose to 11.3 per cent in the last quarter of 2012, up from 10.8 per cent in the third quarter of last year, and slightly above our end- 2012 unemployment forecast of 10.5 per cent.
The Barbadian labour market continues to struggle, and we expect unemployment may have ticked up again in the first quarter of 2013, as the economy contracted by 0.4 per cent. That said, we expected real GDP growth to pick up in 2013 and come in at 0.6 per cent for the year, underpinning our forecast for unemployment to fall throughout the year and end 2013 at 10.2 per cent.
The most recent high-frequency data from Barbados indicate that economic activity remains sluggish, with tourism and industrial production quite weak, posing downside risk to our view for a slight economic recovery this year, with real GDP growing by 0.6 per cent after zero growth last year.
If we were to see this pattern of weak data continue over the coming months, we would likely revise down our 2013 real GDP growth forecast.
The services sector, in particular the tourism industry, remains the major driver of the Barbadian economy, a focus that we believe will limit the island nation to slow growth in the future.
Moreover, it will remain highly susceptible to consumption patterns and disposable income in just a few countries – Britain, the United States, and Canada – that sent 70.2 per cent of all tourists to Barbados in 2012.
Indeed, a sustained contraction in arrivals from these three countries, as well as from CARICOM nations, resulted in a 7.8 per cent year-on-year decline in total arrivals to Barbados, posing a significant downside risk to our GDP growth forecast for this year.
If arrivals were to remain weak, we would likely expect only sluggish growth in the tourism industry this year. As a result of the industry’s importance to the island’s economy, such a development would likely prompt us to consider revising our 2013 growth forecast lower and revising up our 2013 average unemployment rate forecast of 10.8 per cent, which currently represents a decline from 11.6 per cent in 2012.
Our increasingly wary outlook on Barbados’ growth prospects is also due to our expectation for weakness in other areas of the island’s economy.
First, we expect sustained contraction in industrial production, a pattern that has been under way for years, as more of the island’s economic activity shifts toward tourism and other service industries. Indeed, we forecast that average industrial production will contract by 2.4 per cent in 2013 after a 4.8 per cent drop last year.
Finally, we expect that a lessening contribution from the offshore financial services industry, which had previously helped drive economic activity, will weigh on Barbados over the medium term.
Increasing regulation and a trend toward cracking down on offshore tax havens will see less growth in this industry over the next several years compared with the mid-2000s, yet another headwind for the Barbadian economy.
If the slowdown in this sector were to become even more pronounced than we imagine, and if tourism failed to recover to highs of previous years, we would likely revise down our medium-term GDP forecasts, which currently see real GDP growth averaging 1.4 per cent over the next five years.
• Latin America Monitor provides market data, analysiis and forecasts from Buainess Monitor International.