The old adage here is ‘when the US sneezes, Cayman catches a cold’.
According to a report released last week by a major American investment bank, it looks like our neighbours to the north are starting to sniffle – again.
Moreover, Morgan Stanley’s forecasts of world economic growth for 2011 were cut significantly, dropping from a previous forecast of 4.2 per cent to 3.9 per cent.
The Cayman Islands government’s 2011/12 budget forecast world economic growth in 2011 was based on estimates for gross domestic product growth at 4.4 per cent. Those estimates were done in April by the International Monetary Fund. For the United States, gross domestic product growth was estimated at 2.8 per cent for 2011.
Both of Cayman’s major industries, tourism and finance, heavily depend on the United States for their livelihood. Cayman gets roughly 80 per cent of its stay-over tourists from the US. A large chunk of government’s operating cash comes from fees charged to the financial services industry.
According to government budget documents released in June: “The economic outlook for both advanced economies and emerging and developing countries remains upbeat in 2011 and 2012, as consumer confidence improves, businesses restock and general consumption regains strength.
“The economic outlook for the US is projected to remain stable at 2.8 per cent and 2.9 per cent in 2011 and 2012.”
The Morgan Stanley Global Outlook report released last week said nothing of the kind.
The report noted both the US and Europe were “dangerously close to recession”, blaming “policy errors, especially Europe’s slow and insufficient response to the sovereign debt crisis and the drama around lifting the US debt ceiling”.
“It won’t take much to tip the balance towards recession, especially as a final resolution of the debt crisis … is likely to be slow in coming,” Morgan Stanley economists wrote.
The Morgan Stanley forecast is bad news for Cayman, which has sustained a three-year recession, according to data from the World Bank and the International Monetary Fund. A recession is typically defined as two consecutive quarters – six months – of economic decline or shrinkage.
Cayman’s estimated gross domestic product for 2010 fell by four per cent compared to the previous year. This economic decline follows a drop in gross domestic product of seven per cent in 2009 and 0.7 per cent in 2008 in real terms.
In the Caribbean, only Trinidad and Tobago suffered a worse economic decline than Cayman but the recession there began later and so far has lasted for only two years. Jamaica is, together with Cayman, the only economy in the Caribbean that posted a negative GDP in 2008, 2009 and 2010. Worldwide there are only a handful of countries, for example, Ireland and Latvia, which saw their economies contract in each of the past three years.
The Cayman Islands government helped balance out local economic shrinkage by implementing a number of new fees over the past few years, including an increase in petrol import duty and work permit fees charged to companies that employ foreign-born workers. The slower local economy led to a weaker demand for foreign labour and a 13.1 per cent decline in work permits issued.
“In turn, this is estimated to have pushed down population size to 54,397 in 2010,” the government budget review noted. “The reduction in population placed downward pressure on gross domestic product in 2010 and is expected to continue to have similar effects over the medium-term.”
For the next couple of years, government financial managers have indicated the need for fiscal restraint. However, Cayman’s budget does plan for more “sustained growth” in 2012.
“The spill-over effects of the current global recovery on Cayman is expected to benefit local industries in 2012,” budget documents read.