Premier: Cash reserves, capital projects will help insulate against global downturn

OECD expects further slowdown

Forecasts for the global economy have been gloomy for some time. The Cayman Islands government is currently debating a budget based on conservative revenue estimates in light of the deteriorating global economic environment.

In its latest economic outlook, the Organisation for Economic Cooperation and Development further reduced its global growth projections for 2020 and 2021 to 2.9%-3%. Political uncertainty, trade conflicts and weak business investment were weighing the world economy down, the organisation said Thursday.

In 2018, global GDP expanded 3.5%.

In an interview with the Cayman Compass earlier this month, Premier Alden McLaughlin said Cayman must prepare for economic headwind.

“I do believe, as do my advisors, that by this time next year we will begin to see a significant economic slowdown, not because of anything to do with Cayman but because of the global economy.”

Premier Alden McLaughlin

He said the current boom cycle had been going on for longer than usual and forecasts were pointing to a significant slowdown but not an outright recession.

Because Cayman usually feels the impact of a global downturn within six months, there is not much time to prepare.

“It is easy to become complacent and to believe that we are on autopilot, [that] it doesn’t matter what we do or who is in charge [and that] things are going to continue the way they are. But that is not the case at all,” the premier said.

“One of the things we are doing is by the end of this year we will have more than $400 million in cash balances, to give government the fiscal space it may need and, in my view, is likely to need when a downturn comes. So, we won’t be where we were the last time this happened when among other things civil service salaries got cut.”

McLaughlin said economic activity, including construction projects, like the proposed cruise berthing facility, would help insulate Cayman against the impacts of a downturn.

He acknowledged concerns about overdevelopment but said it was a tough balancing act and government had crafted policies to boost the economy and reduce unemployment, which dropped from 10.5% to 4.8% during his tenure.

“You make these decisions to spur development, to spur economic activity. There is no sort of convenient valve you can adjust to say we like it at those numbers and that is where we are going to hold it,” he said.

OECD economic outlook

Presenting the economic outlook in Paris, OECD chief economist Laurence Boone said it would be a mistake to consider that low global growth is due to temporary factors that can be addressed with monetary or fiscal policy alone. “The issues are structural. Without coordination for trade and global taxation, clear policy directions for the energy transition, uncertainty will continue to loom large and damage growth prospects,” he said.

The OECD advocates “bold action” to tackle the high levels of uncertainty facing businesses and the fundamental changes that are underway in the global economy.

Policymaking should lead the transition to cleaner energy and a more digital world. In addition, governments should boost investment and cooperate to establish fair international rules on taxation and trade.

The OECD isspearheading a global tax reform initiative at the direction of the G20 group of the world’s largest economies. The project seeks to find new ways of taxing digital companies and other mobile businesses in markets where they have many customers but no physical presence. It also attempts to find a consensus around a global minimum rate of taxation for multinational companies.

In its economic outlook, the organisation highlights that the slowdown involves both advanced and emerging-market economies but is stronger in countries that rely on international trade.

Two years of escalating conflict over tariffs, mainly between the US and China, has hit trade, is undermining business investment and is putting jobs at risk. Although household spending has been holding up, there are signs of it weakening. Car sales, for instance, have declined sharply over the past year.

Growth in the US is forecast to slow to 2% in 2020 and 2021. In the euro area and Japan, growth is expected at around 1% and 0.75%, respectively, while the deceleration in China’s expansion is set to reach 5.5% in 2021, compared with 6.6% last year.

While the fragility of the world economy can be blamed in large part on deliberate policy decisions, it also reflects deeper, structural changes, the outlook said. Digitalisation is transforming business models while climate and demographic changes are already disrupting existing patterns of activity. China, meanwhile, is rebalancing away from a reliance on exports and manufacturing towards consumption and services.

Speaking in Beijing where he was meeting Chinese Premier Li Keqiang and other heads of international organisations, OECD Secretary-General Angel Gurría said, “The alarm bells are ringing loud and clear.” Unless governments are taking decisive action to help boost investment and adapt their economies to the challenges “we are heading for a long-term future of low growth and declining living standards”, he said.

Aggregate investment growth in the G20 countries, excluding China, slowed from an annual rate of 5% at the start of 2018 to only 1% in the first half of 2019, the outlook shows. Global trade volume growth of goods and services is estimated to have slowed to 1% this year – its lowest rate since 2009. Although a modest pick-up is projected, it is expected to remain weak.

The outlook warns that any further escalation of trade conflicts would create additional disruptions to supply networks and weigh on confidence, jobs and incomes. Uncertainty about a future EU-UK trade relationship poses a further risk to growth as does the current high level of corporate debt.