More economic challenges ahead on rocky road to better times
BY JONATHAN KENT
Covid-19’s persistence scotched hopes of a strong economic rebound in 2021 and brought further misery for those involved in businesses that rely on in-person contact, from hospitality to personal services. After two tumultuous years, where does the Bermuda economy go from here? RG Business Outlook looks ahead to the next 12 months with a summary of some of the themes we can expect to influence Bermuda’s fortunes in 2022.
Covid-19 may well once more be the largest single influence on the economy. Any repeat of the “third wave” we experienced in 2021, as the delta variant surged through the community, would again inevitably lead to heightened restrictions limiting economic activity in already vulnerable sectors. While the virus is not going away, there is reason to hope that we will find ways to live with it, with less disruption in our lives.
Many experts have spoken about Covid’s likely transition from pandemic to endemic. Maria Van Kerkhove, a World Health Organisation epidemiologist, expects 2022 to be a year in which “we can significantly reduce severe disease and death”, especially if the WHO’s target of 70 per cent of the world’s population being vaccinated is achieved. A combination of higher vaccination rates, naturally acquired immunity among an ever-increasing group already exposed, and a proliferation of treatments for both early and severe stages of the disease should all help to reduce hospitalisations and deaths. But the possibility of new variants that evade immunity always looms.
Inflation soared to 6.2 per cent in October in the United States, the highest in more than 30 years, after running at 5.3 per cent over the third quarter. Reasons for the spike put forward by economists include ongoing disruptions in global supply; turmoil in the labour markets as job vacancies remain unfilled and companies struggle to hang onto their best talent; price comparisons against last year’s shutdowns; and pent-up demand for goods and services as economies reopen.
Normally, as the saying goes, when the US sneezes, Bermuda catches cold. And when the island’s largest supplier of goods is being hit by an inflationary surge, one would expect that to show up in local prices. However, the latest Consumer Price Index report in Bermuda showed an inflation rate of 1.6 per cent in August. An October report by investment firm Anchor Investment Management posited that actual inflation in Bermuda is much higher than reported and that a spike is on the way.
Anchor pointed to rising shipping costs, with businesses paying $25,000 to bring in a container that had recently cost only $6,000; increasing crude oil prices that will lead to higher fuel charges on electricity bills in coming months; and soaring healthcare costs – the standard premium rate rose by 13.9 per cent this year.
A sharp rise in the cost of living is likely to dampen economic growth while weighing on the budgets of those already struggling to get by. Central banks often react to inflation by increasing interest rates. This is worrying prospect for borrowers, particularly those whose finances are stretched, such as the Bermuda Government, which faces the daunting prospect of higher debt service costs, as it must roll over nearly $1 billion of its debt over the next two years. Hopefully, this inflation surge will prove to be fleeting.
3 International business
International business directly generated 27.3 per cent of GDP in 2020 and indirectly drives much more economic activity in other sectors. The re/insurance industry has remained strong during the pandemic and attracted new capital and companies – even while plans for a 15 per cent global minimum tax were being publicly pursued – suggesting that investors see more to Bermuda than a tax advantage. That bodes well for the future, as does the island’s well-founded claim to be a leader in climate risk, a capability that will hold increasing value in a world dealing with the consequences of a warming planet – including more frequent and severe storms, flooding and wildfires. While Bermuda will have to work on the appeal of its non-tax characteristics, by maintaining its regulatory excellence and flexibility, and limiting its relatively high cost of doing business, the all-important re/insurance sector looks set to remain Bermuda’s flagship industry.
4 Tourism and travel
It’s no secret that the pandemic has been disastrous for tourism-related industries. Air arrivals during the July-through-September peak tourism period were down 62 per cent on pre-pandemic 2019, while only a trickle of cruise ships visited. The Caribbean region fared better over this three-month period with international arrivals down 38 per cent from pre-pandemic numbers. Bermuda’s rigorous Covid-19 testing regime for travellers, which requires immunised visitors to be tested on arrival, day four and day ten of their visit, may be causing the island to lose out to less stringent rival destinations. The industry will hope that Bermuda does not carry the same competitive disadvantage in 2022.
Airlift is fundamental to recovery. In the crucial third quarter, there were less than half the number of number of seats on commercial airline flights to Bermuda than there were in the same period of 2019. Consequently, there have been days when there are no direct flights to New York’s JFK Airport, a significant blow for international business as well as tourism.
A promising debut year for the new St Regis Bermuda Resort in St George’s was the bright spot in another devastating tourism season. A proposed overhaul of the Fairmont Southampton and a planned redevelopment of the Ariel Sands cottage colony cannot come soon enough.
5 Government Economic Recovery Plan
Gross domestic product plunged 6.9 per cent in 2020. Recovery will require ingenuity, particularly when it comes to creating new work opportunities for the unemployed. More than 80 ideas from a private-public sector committee were whittled down to 31 to make it into the Government’s Economic Recovery Plan, the implementation of which could add up to 1.5 percentage points to base-level growth, the Ministry of Finance estimates. The seven core themes of the plan are:
• Economic diversification: by bringing in private-sector investment alongside the Government’s own financial commitment, Bermuda will launch new industries in fields such as medical tourism, vertical farming, casinos and sub-sea communications.
• Making financial markets work better: measures to reduce mortgage borrowing rates; financial support for struggling small businesses and the creation of the National Digital Bank.
• Infrastructure development: completing construction of the Shoreside fishing facility, investing in the development of a new waste and water management facility, and building the necessary recharging infrastructure for electric vehicles.
• Expanding Bermuda’s resident population: the introduction of an Economic Investment Certificate, as well as regularising the position of long-term residents and making it easier for Bermudians born overseas to return home.
• Labour market reforms: the execution of Bermuda’s national jobs strategy and youth employment strategy, establishing national unemployment insurance, and implementing minimum and living wage legislation.
• Healthcare reform: introduction of an affordable universal healthcare system and other measures to reduce the costs paid by Bermudians for their medicines.
• Innovation-friendly regulatory framework: develop an energy regulatory sandbox that will allow Bermuda to benefit from innovative technology in the energy sector; creating a marine development zone; and exploring options to encourage fintech innovation.
While some progress has already been made and these ideas carry great potential, the words of David Burt, the Premier, after he was pressed on a lack of detail in November’s Throne Speech, sum up how the Government’s performance will be judged in 2022: “The people of this country don’t need more ideas, what they need is execution.”
6 The way we work
The pandemic has wreaked havoc with employment. Job losses have been severe among hospitality, service and sales workers, as the total number of posts filled in Bermuda declined by 1,951 to the lowest total since 1985. Many of those still employed have been working remotely and some may be reluctant to come back to the office. A hybrid model involving some remote working and some office time may prove a popular option among businesses looking to hold onto their leading talent. This would have repercussions for commercial real estate, as firms may downsize their office space, or adapt it to have a more collaborative purpose, and for retailers and restaurants, whose trade is heavily reliant on people coming into Hamilton every day.
Overcoming these ongoing challenges will not be easy: it’s likely to be a rocky road to better times.