Bermuda, post-Covid

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By Nathan Kowalski and Joel Duffy, of Anchor Investment Management

The world has changed. A major pandemic will do that. Covid has altered not just what we do but also how we all think about what we do. It has been one of the biggest, if not the biggest, forced experiments the world has ever seen. The repercussions of which will undoubtedly alter much of how we do things but also where and why we do them. Bermuda will, of course, be part of this change. The post-Covid world will also affect the island and how work and the economy functions. Here are a few ways in which we think the island will change after the pandemic.

Work From Home will massively affect working in Bermuda

“A lot of people have found they don’t need to be [in an office]. I think all kinds of things are going to happen that we don’t go back to what we did before.” – Charlie Munger, CNBC Interview, June 29, 2021
Part of the forced experiment from Covid was the requirement to stay home. If you were fortunate enough to have a job that was amendable to a shelter-in-place order, the side effects of this were not so dire. Many companies were able to use technology to adapt to a new environment. In doing so, many employees realised that a different work environment was potentially as efficient, if not more so, than the pre-Covid environment. This experiment is almost assuredly to lead to persistent change for many jobs and workers. Various studies and surveys have propagated the discussion surrounding this.

Here are some findings:
•      The Federal Reserve Bank of Atlanta estimates that the share of working days spent at home by full-time workers is likely to triple after the pandemic relative to pre-pandemic levels.
•.     A University of Chicago research paper found that 37 per cent of jobs in the United States can be done entirely at home.
•      A recent survey of 2,033 office workers worldwide by the commercial real estate firm JLL found that roughly one-quarter of office workers hope to return to the office full-time after the health risks of the virus subside, while about half hope their employer supports a hybrid model of being remote part-time (on average twice a week, per survey results) and in the office for the remainder of the work week. The remaining one in four workers hope to make their work-from-home arrangement a full-time and permanent adjustment.
•      A couple of surveys from Harvard found “about 40 per cent of both large and small firms expect that 40 percent or more of their workers who switched to remote work during the crisis will stay doing remote work after the crisis. These estimates suggest that at least 16 per cent of American workers will switch from professional offices to working at home at least two days per week as a result of Covid-19.”
•      According to a typical employer can save an average of $11,000 per half-time telecommuter per year.
•     “A Gartner, Inc survey of 317 CFOs and finance leaders on March 30, 2020, revealed that 74 per cent will move at least 5 per cent of their previously on-site workforce to permanently remote positions post-Covid 19.”
•      97.6 per cent of remote workers would like to work remotely at least some of the time for the rest of their careers.

Obviously if these various findings are correct there will be a dramatic and persistent shift in workplace norms around remote work, and this will have implications for companies, employees, and policymakers alike within Bermuda. In fact, this could alter the allocation of labour resources domiciled in Bermuda, which could negatively affect taxes, real estate, and the overall level of the economy. If you do not need to be in Hamilton to do your job, then you can likely do your job in Halifax. Sadly, this has been the case for some time in certain industries in Bermuda like the fund administration sector.

A few international businesses are considering moving entire finance departments off island to cheaper domiciles noting the success of remote working. Other companies continue to allow relocation of expat workers to their countries of origin onshore as well. The high cost of living has always been a challenge for the island, and it is important that Bermuda continues to attract high-paying jobs that are located domestically.

It could be noted that some of this is being offset by digital nomads who have come to work in Bermuda. Figures suggest there could be more than 400 digital nomads in Bermuda. Although they contribute to the local economy from spending on things like rent and food, they are, however, not a viable substitute for a full time equivalent (FTE) worker in Bermuda. An FTE is more likely to contribute to our health care system and pay taxes locally – two rather large factors that Bermuda desperately needs. They may also be causing problems in the rental market where some Bermudians and local expat workers are finding it difficult to find rental accommodation.

Work from Home (WFH) will shift work outside of Bermuda, and even within Bermuda. In turn this will affect the city of Hamilton and Bermuda’s major urban corridors. The fewer people who come into the city, the less overall activity will be generated by foot traffic. This is likely to dramatically impact the overall level of lunch traffic in restaurants, coffee bars and even retail.

A vibrant office environment lends itself to a vibrant commercial ancillary service sector. The Chamber of Commerce recent foot survey, for example, exemplifies what can happen when city activity contracts and mobility collapses. The latest survey noted 57 businesses of Bermuda are now permanently closed (8 per cent surveyed), while 27 per cent were temporarily closed or at reduced hours.

In general, WFH does not really work for Bermuda. If its uptake is extensive, we are likely to see a falling working population, a stagnant urban corridor, and a much lower level of economic activity. Although the ability to work remotely has saved many businesses in Bermuda, it ultimately has uncovered the reality that lots of work has no geographic permanence. Bermuda will need to continue to emphasise its centre of excellence for the reinsurance industry, its large intellectual capital base and high standard of living.

Travel and tourism

“We will go to the office somewhat, we’ll do some business travel, but dramatically less…My prediction would be that over 50 per cent of business travel and over 30 per cent of days in the office will go away” – Microsoft (MSFT) Co-Founder Bill Gates

The WFH phenomenon and the alteration of how work is conducted will likely lead to less business travel. Bill Gates comment above echoes with the analysis conducted by McKinsey. They note that after the financial crisis it took business travel five years to recover, versus two years for leisure travel. They also reference a survey that notes travel managers expect business travel spending in 2021 will be only half of 2019 and may “never recover to the 2019 level”. Business travel is important. One study notes that business passengers represent 75 per cent of an airline’s profits despite only being 12 per cent of their total passengers. For Bermuda, it is roughly 20 per cent of air arrivals. So, a 50 per cent reduction in business travel effectively lowers overall air arrivals by 10 per cent, not an insignificant amount considering it is likely to account for a disproportionately higher level of spending.

On the tourism side, we are not constructive on the near and medium term based on the Government’s current Covid restrictions, which look overly punitive compared to competing destinations and in relation to our largest trading partner, the United States. See the attached PDF to view a table that compares and contrasts travel policies of various competing jurisdictions current protocols.

Bermuda’s aggressive testing regime is likely to act as a deterrent to near-term tourism and thus we believe this tourism season will not be productive and is likely to fall dramatically short in terms of air arrivals, hotel stays and ultimately overall contribution to the island economy. Until the Covid protocols are relaxed, we do not envision much of a successful tourism industry on the island. In fact, it is unlikely the cruise industry will resume in any material fashion this season due to the current restrictions. Longer term, we do not see Bermuda’s tourism industry hitting pre-Covid numbers until 2025, a few years later than that projected in the Government’s economic recovery plan and more in line with the IMF projections for Caribbean economy recoveries.

The two Bermudas – widening inequality

Inequality in Bermuda has persisted and grown over the last few decades. The pandemic has only helped to accelerate this and widened the gap. This can be seen in several ways. The international business sector could conduct operations digitally and has fared well and, in some cases, excelled over the past year. Blue-collar and customer-facing jobs were most affected by the “shelter-in-place” restrictions. Many domestic industries, like restaurants and tourism have suffered immensely and rely to large degree on businesses returning to normal.

The growing divide is also evident from the recent Labour Force Survey, dated November 2020, which notes the disparity amongst different parts of our population. While the unemployment rate jumped from 3.8 per cent in 2019 to 7.9 per cent in 2020, this was disproportionately driven by those with less education and by those under the age of 24.

For instance, unemployment among those with no formal qualifications rose from 7.4 per cent to 21.3 per cent, and those with just a high school certificate increased from 5.2 per cent to 15.5 per cent. On the other hand, unemployment for those educated with a degree fell from 2.5 per cent to 2.4 per cent. By age cohort, Covid and related lockdown measures had the largest impact on younger workers with the unemployment rate for those aged 16-24, who typically work in the retail and restaurant sectors, rose from 18.1 per cent in 2019 to 32.1 per cent in 2020. Many training and internships have had to be discontinued due to the Covid restrictions, because these types of positions typically require more face-to-face and in-person management.

Governments globally have been faced with increasing pressure to rectify expanding inequality and Bermuda is no different. Covid has introduced a sense of urgency and ignited the feeling that this is the time and opportunity for change. The result of all this is likely to translate into further policy actions by government. We have already seen it in the restriction of certain job categories to essentially force local employers to hire Bermudians.

The belief that we cannot go back to the way things were before, and that the world must evolve is becoming a majority opinion. This will lead policy makers to also favour more progressive tax policies, labour-friendly regulation and further assessment of taxing capital earnings, such as real estate. We see increased likelihood of this affecting the tax reform initiatives which are being considered in Bermuda.

We also would not be surprised to see a more comprehensive and progressive healthcare initiative that pushes funding towards those of greater means. Unfortunately, this will not offer a great deal of relief for businesses trying to crawl back out of the Covid abyss and may increase the overall cost of business and the competitiveness of Bermuda even further.

The post-Covid world, as noted, does not play overly favourably for Bermuda. Although many companies will adapt and adopt more digital business models and operations, doing so will not necessarily increase domestic demand. The adoption of working from home, tourism/travel struggles and policies surrounding the correction of inequalities are not positive economic factors that will drive enhanced growth opportunities in Bermuda. Sadly, they will make the uphill climb only steeper.

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