BRIDGETOWN, Barbados, January 30, 2008 – 2008 is shaping up to be a challenging one for the Barbadian economy, according to that island’s lead economist, Central Bank of Barbados governor, Dr Marion Williams.
As Dr Williams delivered her review of Barbados’ economic performance in 2007 and projections for 2008 to the media yesterday from the bank’s Bridgetown headquarters, she revealed the economy grew by a healthy 4.3% last year (its sixth consecutive year of growth), but predicted 2008 would see a slow down with economic growth between 3% and 3.5%.
Impact of a US recession
She further cautioned that the Bank would likely have to revise those figures “depending on the magnitude and duration of the expected recession in the United States”, which would be exacerbated “if there is a recession which moves beyond the US, particularly if it involves Canada, Europe and the UK, particularly the latter”.
The United Kingdom is Barbados’ leading source of tourist arrivals, followed by Canada and the United States; while Canada is its leading source for foreign direct investment. Barbados, like the rest of CARICOM, has also recently concluded negotiations on an economic partnership agreement with the Europe Union, which would see significant duty free access for its goods into the 27-member state market.
However, Williams did offer a silver lining to the cloud, noting that inflation “is expected to moderate further, especially if growth in international energy and commodity prices is constrained by the expected recession in the United States”.
She noted that up to the end of October 2007, the 12-month moving average inflation rate had declined to 4.2% from the 7.6% recorded over the same period the previous year. This, she attributed to a drop in prices for fuel, light, transportation and housing.
Last year’s economic growth– which bettered its average growth rate of 3.1% over the last five years – was partially driven by a 3.3% increase in tourism arrivals, primarily boosted by a turnaround in the second quarter thanks to an influx of visitors for the International Cricket Council’s Cricket World Cup in the West Indies.
Increases were also recorded in the final two quarters, offsetting the nearly 7% decline recorded in the first quarter. While visitor numbers from the US, UK and Canada were up, CARICOM visitors – traditionally Barbados’ third largest market – fell by 16%. Williams attributed this to the escalating air fares and rationalisation of routes that has characterised regional travel over the last year.
Tourism expected to continue improving
While predicting tourism would continue to improve in 2008, “albeit at a slower rate”, Williams said significant competition for tourists would come from the summer Olympics in China and the 2008 UEFA European Cup in Austria and Switzerland. This, she said, coupled with a higher import bill, would likely lead to further deterioration in the external current account this year. 2007 saw a slight narrowing of the gap in the external current account deficit to 6.6% of gross domestic product (GDP) from the 8.1% recorded in 2006.
Williams said widening of the deficit in 2008 was unlikely to be offset by foreign capital inflows, which are projected to be weaker than last year, thus leading to greater draw down on the country’s Net International Reserves (NIR). Barbados recorded significant growth in its NIR over 2007, which reached $353.5 million – the largest accumulation since 2001.
Along with tourism, Williams identified the 2007 economic drivers as sugar agriculture, which expanded by 0.6%; non-sugar agriculture, which rebounded to register a 4.2% growth after a 2.9% decline the previous year; plus a 5% increase in non-traded activity, largely driven by expansion in construction, wholesale and retail, transport, storage and communication.
Barbados’ offshore sector continued to grow with 470 new licenses issued to international business and financial services firms over the year. The financial sector also saw “robust growth” in domestic deposits, which caused liquidity in the banking system to further increase as savings outpaced loans.
Deficit expected to grow
However, government’s performance was less positive. In 2007, the fiscal deficit surpassed the previously projected 2.5% of GDP to reach over 3%. Williams attributed this to a rise in current expenditure against only a moderate increase in tax revenue.
The recent vow by new Prime Minister David Thompson to ensure that the country’s fiscal deficit is kept around 2% of the value of Barbados’ GDP will be put to the test this year as Williams said the deficit was expected to grow due to planned government expenditure and “continued sluggish growth revenue”.
However, Williams did forecast some positives for this year, saying that a “pick-up” was projected for the manufacturing sector – 2007 resulted in flat growth for the sector, after averaging 1.8% growth over the last three years.
She also expected unemployment to remain in single digits thanks to increased economic activity from broad-based expansion in the non-traded sectors. Up to the end of September 2007, unemployment was down to 7.1%, which Williams attributed to an increased job opportunities in the construction, wholesale and retail, general services, transportation, storage and communication industries.