Bermuda faces a host of economic challenges as we head into. Inflation is running hot and interest rates are soaring, forming a pincer movement likely to slow economic activity and stall the recovery from the damage caused by the Covid-19 pandemic.
Resilience and growth in international business, signs of rebound in tourism and a buoyant real estate market have offered cause for optimism, but will can they remain on track?
The backdrop of an ageing population and an increasing government debt burden looms large over the island’s future, adding to the challenges ahead.
To help us analyse what the coming year may hold, we spoke with Michael Neff, a man with an excellent vantage point from which to observe the Bermuda economy. As Butterfield Bank’s managing director of Bermuda and International Wealth, his customers are from all parts of the economic spectrum, from those struggling to make ends meet, to corporate clients, to the uber wealthy.
A painful rise in the cost of living has affected everyone on the island, particularly those stretched financially. The latest Consumer Price Index figure clocked overall inflation at 4.7 per cent in August, noting a near 10 per cent increase in food prices and 15 per cent rise in fuel and power costs.
More up-to-date data from our largest source of imports, the United States, shows inflation there was 7.7 per cent in October — on the bright side, the lowest rate of price increases since January.
“In Bermuda, we import everything, so we import inflation,” Mr Neff said. “We, as a bank, don’t believe inflation is running at 4.7 per cent: we believe it is 10 per cent or more. If you look at the core items that affect people — food, fuel, electricity — you’re up into the double-digit range.”
The worst-case scenario, Mr Neff added, would be “1970s-style stagflation, where, because of commodity price shocks, there is inflation and at the same time, sluggish economic growth, because we have not yet recovered fully from the pandemic”.
A tight labour market putting upward pressure on wages will maintain inflationary pressure, as well as high energy prices emanating from the Ukraine war and extraordinarily high prices of many building materials.
Central banks’ main weapon against inflation is to raise interest rates. The knock-on effects have hit Bermuda borrowers in the pocket. Mr Neff said: “I think you will see far fewer rate rises in the coming year, but you’re likely to see a sustained period of elevated rates to make sure that inflation is being cured. So we’re all going to go through a period of pain, because to kill off inflation, you have to kill off demand.
“The consensus view is towards the back end of next year, rates will start to come down. We would agree with that, but as we as we have seen, the world is a very unpredictable place and the Fed will be guided by the data.”
Higher interest rates have a silver lining for Bermuda’s property and casualty and life re/insurers, who invest massive portfolios of premiums invested predominantly in fixed-income securities. Resulting increases to investment income will boost their profitability.
The re/insurance industry, the main plank of Bermuda’s international business sector, has been on a roll. Despite taking a hit from losses related to the pandemic and the relatively high incidence of catastrophes, the insurance industry’s prospects for 2023 appear promising.
Fitch Ratings has predicted reinsurance rates will increase 10 per cent during January 1 renewals. Meanwhile, expect an uptick in investment income courtesy of higher interest rates.
Inflation, while it creates challenges for underwriters in pricing coverage correctly, will also serve to continue the upward momentum in rates that has been evident for some years, as will the ongoing and increasingly apparent impact of climate change.
Bermuda’s re/insurers are seeing growth beyond their traditional strength in property-catastrophe business, in areas such as mortgage and cyber. In addition, as John Huff, CEO of the Association of Bermuda Insurers and Reinsurers remarked last month: “Bermuda insurers and reinsurers are also becoming the specialty and casualty market of choice.” This trend was evident in ABIR’s global underwriting results survey, which revealed a 21 per cent increase in net its member companies’ net premium written.
The life reinsurance sector continues to boom, driven by secular tailwinds — a growing need for retirement solutions from a global ageing population and a burgeoning demand for life insurance from a growing middle class.
A hardening market also makes self-insurance options more attractive, driving further growth and new uses for captive insurers, another world-leading segment of the Bermuda market. Insurance-linked securities have also proved resilient after Category 4 Hurricane Ian caused devastation in Florida.
While fintech will suffer a blow in confidence emanating from the collapse of the FTX brokerage, another consequence may be a growing acceptance the industry cannot expect to gain the trust of investors without effective oversight — and the island, as a leader in digital assets regulation, will have a case to argue that it can provide it.
It’s shaping up to be a tough 2023 for domestic enterprises.
“The pandemic was bad enough, but our recovery will be frustrated by the economic environment we’re in,” Mr Neff said. “If you adjust for inflation, retail sales are lower now than they’ve been in the last 15 years.
“If you asked me, when we look at our loan book, what we worry about — we worry about small and medium-sized enterprises. And we will work with those customers as we did in the pandemic. It’s of no interest to us to have clients go to the wall.”
Inflation will drive up input costs for local businesses, as staff ask for pay rises to keep up with the soaring cost of living. Businesses’ resilience through the upcoming tough period will partly be determined by their ability to pass on rising costs to customers — which will be harder for those selling discretionary products and services than for those selling essentials.
On the bright side, a rebound in tourism may help the surviving businesses that suffered most during the pandemic, as will the knock-on effects from the continuing success of the international business sector.
Bermuda has a rapidly growing cohort of seniors as baby boomers continue to retire. At the same time, the number of working people whose taxes and health insurance premiums fund the healthcare and pension system for seniors, has plunged. By 2021, there were 31,316 filled jobs in Bermuda, 8,897 fewer than in 2008. Over that 13-year period, Bermuda made a net average loss of 684 jobs annually.
In September, Jason Hayward, the Minister of Economy and Labour, declared the Government’s intention to grow the working population by 25 per cent over the five years — a total of 8,418 jobs.
Mr Neff applauded the idea, saying the size of the economy was largely determined by the size of the labour force. “We have to be very focused on how to grow the pie,” Mr Neff said. “We would like to see more clarity from the Government on how we’re going to add more than 1,500 jobs a year, but it’s very encouraging to hear them say that’s what needs to happen.
“By 2026, 25 per cent of our population will be 65 and older. That’s a scary demographic. Clearly a bigger working population will be needed to support pension and healthcare costs.”
To achieve an increase in the workforce will require a coordinated effort, he added, that could perhaps be harnessed by a task force drawn from the public and private sectors.
“If we agree that we need to grow the working population, the next question is, OK, so how do we deliver on that?” Mr Neff said.
There are signs in the US that inflation may be starting to cool off and the US Federal Reserve has signalled that it will slow the pace of interest rate increases. There is light at the end of the tunnel.
Mr Neff concluded: “Most people think the US will have a mild recession next year, and we don’t disagree. And when the US sneezes, Bermuda catches cold.
“Sadly, that’s where we are, and we’re going to have to manage through a difficult year. But a general recovery back to pre-pandemic levels is probably on the cards — it’s just going to take longer than we had hoped.”