How does a 15% contraction feel? Like 2013 – only worse

Current economic projections predict recessions all over the world at levels rarely, if ever, seen before. The Cayman Islands, for instance, is facing a 15% contraction of its economic activity this year.

But what does this really mean? In terms of economic activity, it would transport the islands back to where they were in 2013.

Economist Marla Dukharan, who is from Trinidad and Tobago but based in Barbados, says, “If you throw your mind back to what 2013 looked like, it gives you some context as to what this might feel like.”

Economist Marla Dukharan during the CFA Society’s webinar on Tuesday.

Other countries in the region are worse off. Barbados would return to how its economy was in 2003 and Bermuda would lose a full 20 years of growth, if its economy declines by the forecasted 12.5%.

The problem is, of course, that in 2013, Cayman’s economy was already four years out of its last severe economic downturn. The economy had started to grow again, and unemployment had peaked the year before.

A recent Chamber of Commerce study estimated a four-month lockdown would result in up to 14,000 jobs lost this year; that represents 28.5% of all jobs in Cayman. With Cayman’s labour force expected to shrink, resulting in rising unemployment, the feeling might be different from 2013 after all.

The government is also deliberating keeping Cayman’s border closed at least until September and possibly longer, making the impact on the job market even more severe, Dukharan said on Tuesday, during a webinar organised by the CFA Society Cayman Islands.

While Cayman’s unemployment was at record lows before the COVID-19 crisis, “this is still going to bite very hard”, the economist said.

Fiscal strength
To recover from a 15% decline in GDP, Cayman would have to grow by 17.6% the following year. However, projections for 2021 of 8.5% are much lower than that. And even these growth figures assume that international travel, tourism and oil prices would recover next year.

Still, Dukharan noted, Cayman is a massive outlier in the region, if not globally, in terms of its fiscal strength.

Cayman’s debt fell to 9.4% of GDP at the end of 2019 after seven consecutive years of fiscal surpluses. Growth has been positive and stable since 2011. And the islands have maintained an Aa3 rating, the highest in the region, with a stable outlook from Moody’s since December 1997.

Cayman shows that fiscal prudence and stable growth can go hand in hand, she said. “Cayman has a strong balance sheet and is in the best position in the region to withstand the current crisis.”

Some of that balance sheet might be needed to counter the downturn.

Debt and growth
Of all the variables that make up gross domestic product, government spending is currently the only one that is not trending downward.

In the COVID-19 crisis, consumption is down because of a supply shock, investments have slowed because there has been a blow to confidence, exports such as tourism are severely impacted, and imports are lower due to lower demand and supply-chain disruptions.

“The one thing that is within our control is government spending,” Dukharan said.
But while governments appear to spend more to maintain payroll, stimulate economic activity, maintain healthcare and increase social-welfare support, most governments do not spend more than they had planned in their budgets, she said.

Instead, they are shifting budget items and running wider deficits to cover the shortfall of collapsing revenues.

If Cayman were to borrow right now and spend that money on supporting payroll and small and medium enterprises, the effect on GDP would be positive, she said.

In fact, its low overall debt of less than 10% debt-to-GDP would make it one of the few countries that would see a positive relationship between this type of spending and GDP, she added, citing a 2012 IMF study.

The paper, which looked at the threshold effects of sovereign debt in the Caribbean, found that at debt levels lower than 30% of GDP, increases in the debt-to-GDP ratio are associated with faster economic growth.

As debt rises beyond 30%, the effect on economic growth diminishes rapidly, and at around 55% debt becomes a drag on growth.

That would leave ample room for the government to incur new debt in support of the economy.

The path to a new normal
When tourism can return back to normal is anyone’s guess. “We assume that before there is a vaccine, there will be very little, almost no, international tourism for this region,” Dukharan said.

She suggested there may well be a phased approach to bringing tourism back online. First, with staycations or by allowing people who can fly privately to self-isolate for two weeks in holiday villas under strict conditions. Then, by establishing safe corridors between countries that have eradicated the virus and apply the same safety protocols.

Yet, even when the virus is under control, this does not mean that tourism will automatically return to previous levels.

Surveys show that currently 85% of Americans do not feel comfortable about the prospect of travelling by plane. And 40% of Americans say they will wait at least six months before they would even consider going on vacation again.

After the September 11 attack, it took the Americas 42 months to recover and return to previous tourist arrival levels, according to the World Tourism Organization.

“Even when we open our airports back up and we open our border, we still have this challenge on our hands,” Dukharan said.

Some forecasts do not see travel returning to 2019 levels until 2025. Some airlines are saying they will not record 2019 levels of flight activity for the next two to three years.

The economist believes business travel is going to change forever now that everybody is used to meetings on Zoom. “We recognise how much of our business travel is really unnecessary.”

Companies hit by the downturn will look to cut their travel budgets in the future. And for individuals, facing high unemployment and wage suppression, vacationing will not have such a high priority, Dukharan said.

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