Tough road ahead

After 2009’s nose dive into economic turmoil both at home and abroad, what can we expect from 2010 – more of the same, a modest recovery or a rip roaring year? The Chamber of Commerce’s luncheon at the Grand Cayman Marriott recently welcomed Royal Bank of Canada’s senior vice president and chief economist Craig Wright to shed some light on the movement of the economy this year and beyond. Business Editor Lindsey Turnbull reports.

Cayman’s economy had to deal with the double whammy of trying to withstand global recessionary pressures that have hit both tourism and financial services, traditionally the twin pillars of Cayman’s economy, as well as the added pressure brought to bear by the previous government’s unsustainable fiscal policy, which led it heavily into debt. Fiscal prudency all round, it seems, is therefore a top requirement for strong recovery.

Modest recovery requires fundamentals to be in place

Royal Bank of Canada’s vice president and chief economist Craig Wright had some salutary thoughts on both the local and broader economy and began his presentation at the Chamber of Commerce’s luncheon by an assessment of the big picture.
Wright listed factors he believed needed to be in place in order for global economic growth to take place in 2010. Firstly he said that credit needed to become more readily available, cheaper and there also needed to be an increase in demand for it. “Indicators show that credit is becoming more easily available but demand still needs to increase in order for the economy to be stimulated back into recovery,” he said.
Another important factor to promote global economic growth was how successfully the US gets out of its current economic crisis.
“The US led the way into the recession and it will have to lead the way out to recovery,” Wright said. “The US economy is now officially out of recession, which is a positive sign, and is now in the recovery phase.”
However Wright cautioned that the reason the US economy got into the current state was a combination of too much liquidity fuelling too much borrowing, unsustainable fiscal policies and interest rates that were too low.
“The solution to the economic crisis seems to be more of the same: unsustainable fiscal policies, interest rates that are too low and too much liquidity,” he stated.
Wright went on to warn: “The US needs to get to grips with its exit strategy when it comes to recovery. Lift interest rates too soon and the US risks a double dip recession similar to Japan’s fate in the 1990s, for which they are still recovering; too late and they risk inflation.”
The US would be looking at the implementation of higher taxes towards the end of this year to help pay for its huge deficit, Wright said.
The good news was, according to Wright, that the International Monetary Fund was becoming more positive in its global growth outlook. “The IMF’s prediction for global growth at the beginning of 2009 was around four per cent. By the end of that year that figure had been revised to a decline of one per cent. At the beginning of 2010 they estimated global growth to be at around 0.9 per cent and now that figure has increased to 3.1 per cent.”
Emerging markets would be the drivers of global growth, according to Wright, and although these economies were not able to single handedly drive the world into recovery mode, they would make a big impact in the right direction. China continues to lead the way with growth predictions of between 9 to 10 per cent for this year, with India hot on its heels at “high single digit” numbers.

Cayman’s path to recovery
Wright said that Cayman’s recession was not homemade and that it would require strong recovery by the US to lift Cayman’s economy.
“Cayman’s economy has two jurisdictions that drive it – the US and the UK, both of which have suffered deep recessions to their own economies. In addition, Cayman’s main sources of economic growth – tourism and financial services – have also taken a blow this past year,” Wright said. “It is therefore a challenging time for the Cayman Islands.”
“Cayman will still feel recessionary pressure in 2010 because consumers will lag behind the US recovery and in particular employment will take time to catch up with the recovery. This is because businesses take time to realise that they are out of recession and therefore the rehiring of staff laid off during the recession tends to lag behind positive figures. The knock on effect will be that tourism may take longer to recover,” Wright explained and continued: “The good news is that there were positive employment figures in the US for the third quarter of last year which indicates more income may be generated, which will translate into more confidence and therefore an increase in consumer spending.”
Changes in the regulatory environment in the US may also cause pressure on Cayman’s financial services industry, as Wright said: “Innovation got ahead of regulation prior to the recession but the danger now is that new regulation will make the pendulum swing too high in the opposite direction. At the moment we have regulation proposals coming in from many different directions and there is a real risk if an overlayering of regulations is allowed to take place which may end up smothering the industry and causing growth to stagnate.”
Wright believed that smart regulation may reduce risk without preventing growth. “I think new regulation will target transparency, increased requirements for capital, a reduction in leverage, and more diversification, to create a standard bank model. The hope is that politics does not overtake policy.”
Wright believed that the best economies able to withstand economic shocks such as those recently felt are those which are fiscally prudent and have sound fiscal policies.     
Wright analysed Canada’s position as a comparison to the US economy and said that it went through its worst fiscal crisis in the 1990s (at that time Wright said that the Wall Street Journal called the Canadian dollar “the northern peso”). A period of reduced government spending coupled with an increase in taxes then followed which meant out of all G7 countries Canada was actually the best placed to weather the current financial crisis with the lowest government debt.
“Government spending needs to be tied to population growth and real GDP. It is the only way to properly calculate government spending,” Wright said. “Governments that have sound fiscal policy will still be pulled into recessionary cycles but they will also pull out of them; however governments already at their limit when it comes to borrowing will find it harder to withstand recession. This will weigh on the growth prospects of the jurisdiction.”