Former US Federal Reserve Chairman Alan Greenspan, in speaking on Monday, 26 February, via satellite at the VeryGC Global Business Insights 2007 Conference in Hong Kong, warned that the American economy might slip into recession by year’s end.
He said the US economy has been expanding since 2001 and that there are signs the economic cycle is coming to an end. The US economy grew by a strong 3.5 per cent rate in the fourth quarter of 2006, up from a 2 per cent rate in the third quarter. Current leading indicators predict economic growth of 2.7 per cent this year, the slowest rate since 2002. Greenspan also faults the US budget deficit, which fell to $248 billion in 2006 as a concern and a potential factor.
The US average consumer is highly indebted and with inflation still of great concern to US fiscal policy makers, there exist little room or prospects that the Federal Reserve will be able to cut interest rates anytime soon.
The US housing market, which helped finance consumers’ expenditure in the past, has slowed and indeed now shows signs of going bust.
While not wanting to explore too deeply the various areas of concern currently facing the US economy, the above gives but a snapshot of some difficult times ahead.
So, what does a possible slow down in the US economy mean to us here in these Cayman Islands? What can be done to dampen the impact; if anything?
Well, for starters, with some 80 per cent of our trade being with the US any slowdown in its economy would naturally have a direct impact on ours in Cayman.
And we can ill afford a slowing of our local economy! A few present day factors would make this possibility a hard pill to swallow.
One is that for the vast majority of Caymanian citizens and residents, the real impact of Hurricane Ivan is just being felt. This is so due to the fact that for many persons, Ivan actually caused them to deplete a large portion of their savings and other investments, as they not only rebuilt, but in fact enhanced their properties.
For many, the economic climate immediately following Ivan appeared robust. For many, they started a new company and in fact- were making some extra money as they say, on the side.
What has actually been happening since Ivan and more-so since the latter part of 2006 to present, is that cost of living and inflation generally has prohibited the average Caymanian citizen and resident from recovering.
Inflation is far outstripping earnings and added to which you have a situation where the cushion that existed before Ivan in the form of some savings or liquid assets, have been realised and spent.
Now what is facing most people is trying to survive!
Now, as I have already mentioned above, current leading indicators project that the US economy will slump in 2007-08 to a GDP of 2.7 per cent [some indicators even mention a rate of 2.2 per cent], this will only serve to exacerbate the dilemma facing the average Caymanian citizen and resident.
Secondly the Cayman real estate market is mirroring what is happening in the US, especially in the state of Florida, where real estate has slumped in recent months. This adds further concern as for many persons, additional debt was created by building an additional home or apartments to provide rental income. With a fall off in real estate, and a cooling of the economy, rental prices will undoubtedly have to be adjusted.
There is absolutely no secret that many persons incurred various types of expenses in the months following Hurricane Ivan and now find that their expectations of future economic growth has not materialized. The middle class of this country has never been as uncertain of the future as they are currently.
Cost increases that are especially noticeable are supermarket goods and bank interest rate charges. While I am not sure what can be done in regards to imported foodstuffs, I would say that weekly unit increases seem to happen as one buys less and less for the same value. In regards to the bank interest rates, I have written on numerous occasions that what our local banks are allowed to charge for loans has no foundation and should be linked closer to the rates they pay on depositor’s funds. And Government needs to investigate this scenario and take appropriate action.
Another area that cost of living reductions could be passed on to the consumer is for Government to give Caribbean Utilities Company a full duty waiver on the fuel it buys. And, perhaps its time for CUC’s own Ivan Recovery Surcharge to be revisited and removed?
Reductions in the cost of living in Cayman have got to be investigated and action taken to pass on any possible savings to the average consumer. In my humble opinion Government must be a lead agent in this search and endeavour, along with leading private sector service providers. We live in a dynamic universe; times change and with change must come the realization that some corrective action might be necessary. I think such a time has begun to show its head and we should be willing to act pre-emptively.
I could have just ignored the many cries for help that I hear each day, but decided to take a few moments from my day, to put pen to paper and give their cries a voice.
George R. Ebanks
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