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QUARTERLY Economic Review of Barbados Ministry of Finance and Economic Affairs OCTOBER – DECEMBER 2015 Table of Contents 1. Overview ......................................................................................................................... 1 2. Global Economic Overview .......................................................................................... 1 3. Advanced Economies ..................................................................................................... 2 4. Emerging Economies ..................................................................................................... 2 3. Commodity Price Outlook ............................................................................................ 3 4. Impact of International Developments on the Barbadian Economy ........................ 4 5. State of the Barbadian Economy.................................................................................. 5 Real Sector Activity ........................................................................................................ 5 Fiscal Sector Activity ...................................................................................................... 6 Monetary Sector ............................................................................................................. 6 Business Environment Conditions .................................................................................. 7 ii Overview The real gross domestic product (RGDP) within the Barbadian economy continues to rise steadily but at a very anemic pace. Estimates by the Central Bank of Barbados indicate that growth has improved by two percentage points to reach 0.5 per cent by the end of December 2015. Unemployment has improved by 0.6 percentage points to reach 11.3 percent at the end of the third quarter while inflation has dropped to 0.2 per cent. The fiscal deficit was estimated to be 4.0 per cent of GDP and the stock of foreign reserves stood at $926 million at the close of the year representing 13.8 weeks of import cover. Global growth prospects continued to decline as key emerging and developing economies continue to suffer further fall-offs from low and continued decreases in commodity prices. The relatively strong growth performance in advanced economies played a very small role in offsetting the drag commodity bearing developing economies had on global growth. Statistics indicate that despite positive developments in advanced economies, global growth decelerated to 2.4 per cent, a 0.2 percentage points decline from the 2014 growth rate. The decline in commodity prices continue to strip away at any gains recognized from fiscal tightening within emerging and developing nations. Given the share size and global economic integration of the largest emerging markets Brazil, the Russian Federation, India, China, and South Africa (BRICS) it is anticipated that there will be spillover effects to the rest of the world. Global Economic Review1 Figure 1: Global Growth Projections Global growth prospects continued to 5.0 disappoint falling short of expectations at the conclusion of the year 2015. The World Bank 3.0 has estimated that growth has now decelerated 1.0 to 2.42 per cent by the end of the year. This outturn was largely attributed to a further decline -1.0 in key emerging and developing economies. 2014 2015 2016 Developing Countries Latin America & Caribbean All OECD Countries World (WBG members) Modest growth developments within major Source: World Bank 1 2 Projections on growth refers to Countries under the monitoring framework of the World Bank. Projections are based on World Bank Estimates. IMF’s WEO framework estimates puts growth at around 3.1 for 2015 1 high-income countries in conjunction with low commodity prices were not significant enough to counteract the crippling effect of the subdued global trade environment. Notwithstanding 2015’s outcome, it is highly anticipated that during the coming year 2016 global growth will pick-up at an appreciable slower pace with downside risks titled towards emerging and developing economies. Advance Economies The contribution of major advanced Figure 2: Select Advanced Economies (Growth Profile) economies to global growth continues to be 4.0 modest and increasing. This stronger growth 3.0 will be driven by stronger domestic demand, 2.0 particularly in the United States, 1.0 as 0.0 employment conditions are healthy. Also in 2014 2015 the Euro Area, Credit growth is on the increase United States while unemployment is being reduced. The High income: OECD UK’s growth performance remains relatively 2016 United Kingdom Source: World Bank strong amid economic risks and uncertainty. Growth has outstripped other major economies, the unemployment rate has fallen, employment levels are at a high, the fiscal deficit has been reduced, and financial sector resilience has increased. Japan however, remains fragile despite substantial policy stimulus, weak private consumption and investment along with poorer Asian demand for Japanese exports are the main components attributed to this outlook. Emerging Markets and Developing Economies Given the size and global Figure 3: Emerging and Developing Economies (Growth Profile) economic integration of the largest emerging markets — 8.0 Brazil, the Russian Federation, India, China, 6.0 and South Africa (BRICS) — 4.0 the 2.0 simultaneous slowdown in all but one of these 0.0 economies could have significant spillovers 2014 effects to the rest of the world. The World 2015 China Developing Countries Source: World Bank Bank estimates that a 1.0 percentage point 2 2016 BRICs LAC: Caribbean decline in the growth of BRICS can result in a reduction in growth over the following two years by 0.8 percentage points in other emerging markets, 1.5 percentage points in frontier markets, and 0.4 percentage points in the global economy. Spillovers could be considerably larger if the growth slowdown in BRICS were combined with financial market turbulence. Developing economies are forecast to expand by 2.7 per cent in 2016 before slowing to 2.4 per cent within the period. COMMODITY PRICES OUTLOOK Agricultural prices were on average quarter. Prices fell by approximately 15.8 per cent at the end of September but rebounded at the start of 5000.00 4000.00 average by 38.6 per cent while Crude oil prices declined by 22.4 per cent. Coal prices at the end of the year also decreased by 18.7 per cent. 3000.00 2000.00 1000.00 0.00 The price of precious metals on average added to slowdown in the global commodity markets with a 22.6 declined in the average price of precious metals. Platinum metals registered the largest decline over the review period by 30.7 3 2015M12 Figure 5: Commodity Price Indices (Select Metal) the fourth quarter levelled off over the remaining The price for Natural gas decreased on 2015M11 Energy Prices (Average) Coal Prices (Average) Crude oil prices (Average) Natural gas index Average Agricultural Product Prices trending downwards until the end of the third quarter for the year. 2015M10 2015M09 2015M08 2015M07 2015M06 2015M05 2015M04 2015M03 2015M01 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 2015M02 During the year 2015 commodity prices offered little return to investors due to ample supplies and weak demand. At the close of the year 2015 energy prices slumped 13.2 per cent and prices of non-energy commodities dropped by 1.2 per cent. Figure 4: Select Commodity Price Indices (Monthly) Silver Precious Metals ($/troy oz) Gold Platinum Other Metals ($/mt) per cent. This was followed by silver and gold which decline by 18.3 and 14.6 per cent respectively. Impact of International Developments on Barbados Barbados’s economic growth trajectory given the state of the world economy is anticipated to improve. However, any growth progress may be moderated based on the degree of contagion possibly emanating from emerging and developing economies particularly China. These economies which are marked by a drastic slowdown in industrial output and followed by a glut of primary supplies presents some downside risk to trade partners such United States and the United Kingdom. This is despite a relatively small trade share these developing countries have with major developed economic markets. A weaker ‘developing world’ cuts export led growth. The fact that most economies are dependent on Chinese demand for commodities for example, as oil and metals as well as raw material inputs and machine tools exacerbates the export growth performance and by extension financial market performance in these economies. This exposes US based Multinational firms whose investments and debt stocks are intertwined with other developing economies as well. To illustrate further reports indicate that 40 per cent of revenue generated by S&P 500 companies comes from foreign sources. 3 This raises concern and will have to be monitored for possible knock-on effects on investment activity globally. Notwithstanding these developments it is the level of consumption domestically in major markets which continues drive economic activity in such countries such as the US and UK. Consumer spending in the United States increased to 11,322.50 USD Billion in the fourth quarter of 2015 from 11,262.40 USD Billion in the third quarter of 2015. Also, Consumer spending in the United Kingdom increased to 291,746 GBP Million in the third quarter of 2015 from 289,515 GBP Million in the second quarter of 2015. Consumer spending accounts for approximately, 87 per cent in the US and about 62 per cent in the UK.4 For Barbados, though negative developments in the international community could have negative knock-on effects to our major trade partners, and by extension to Barbados, it is highly 3 4 http://money.cnn.com/2015/07/26/investing/china-slowdown-impact-us-stocks/ Data sources from Trading Economics 4 anticipated that the domestic demand conditions within those markets will serve as a critical buffer to effects. Hence, those markets may cushion any pass-through effects to the Barbados market. However, continued vigilance will be required. STATE OF THE BARBADIAN ECONOMY The Barbadian economy continues to show slow but positive signs of recovery, on account of the tourism sector. However, a number of industries are yet to emerge from the subdued state. It is highly anticipated however, that given the number of construction projects set to be executed during the year 2016, positive spill overs will be realised, particularly among the productive foreign exchange industries. Currently, the foreign reserves at the end of December 2015, stood at $926 million, representing 13.8 weeks of import cover which is above the accepted standard of 3 months. Prices continue to decline at a gradual pace reaching 0.2 per cent and unemployment has been reduced by 0.6 percentage points to 11.3 per cent at the end of the third quarter of 2015. Provisional estimates of the leading economic indicator, produced by the Economic Affairs Division, supports the signs of a slow recovery as that index, which provides an early indication of changes in the economy improved after falling by 0.6 per cent at the end of the third quarter in 2015. Real Sector Activity Real GDP growth is estimated to have expanded by 0.5 per cent at the end of December 2015. This growth was led primarily by the traded sector which expanded by 1.6 per cent and aided by a boost in tourism activity which increased by 6.0 per cent. Growth estimated to improve marginally to 0.5 per cent. Tourism is the principle driver of this growth. Key subsectors such as sugar declined by 32.8 per cent, this was followed by food and manufacturing sub-sectors which fell by 1.7 and 1.5 per cent respectively. There were no changes in the electronics, chemicals and furniture subsectors. The non-traded sector grew by 0.2 per cent. The business and other services component was the primary factor supporting growth in this sector with an increase of 0.6 per cent. The major sub-sectors which suffered a decline over the review period included the construction sub-sector with a decrease in output by 3.1 per cent and wholesale & retails declined by 0.3 per cent. 5 Fiscal Sector Activity Revenue flows have fallen off while expenditures continue to grow at a slightly moderate pace compared to the previous year. Monetary Sector Activity Foreign reserves remained relatively stable while liquid assets ratio and commercial bank deposits increased. The fiscal deficit at the end of October 2015 was estimated at around 4.0 per cent of total nominal GDP. This was mainly attributed to the growing expenditure commitments to public institutions; tax receipts overall were low despite some buoyancy from land-tax collections. Current revenue was estimated to have declined slightly by 1.0 per cent year on year (y-o-y) bringing total revenues down to 1,244.2 million dollars. Current expenditure on the other hand increased by 9.3 per cent to reach $2,321.8 million. The major component contributing to the increase in expenditure was current transfers, which when compared to the corresponding period in 2014 increased by 5.4 percent. This was primarily driven by transfer payments which increased by 5.4 per cent or 31 million dollars. Payments to retirees was the principle reason for the surge in expenses escalating to 144.0 million dollars or an increase of 21.3 per cent in payments. Value added tax, the major revenue component fell by 8.3 per cent or 40.8 million dollars to end at 448.4 million dollars in collections. Notwithstanding the performance in VAT collections there was a significant improvement in land tax receipts of 66.9 per cent representing a total of 44.6 million dollars in additional revenue when compared to the previous year’s total. Debt as a percentage of GDP At the end of December, the foreign reserves stood at $926 million, providing 13.8 weeks of import cover. Money supply at the end of October 2015 increased by 19.9 per cent when compared to the same period in 2014. The liquid assets ratio at the end of September 2015 increased to 24.4 per cent compared to 20.1 percent one year earlier. The excess liquidity ratio of 10.3 percent also increased exponentially from the 5.7 per cent recorded within the corresponding period of 2014 (at the end of September). The Treasury-bill discount rate for the same period ended at 2.03 per cent a reduction of 1.14 percentage points in comparison to the equivalent period in 2014. Commercial Bank deposits increased by 6.4 per cent or $543,572.00. Private individuals account for the major share of deposits with a 50.2 per cent. This was followed by Business firms and financial institutions which accounts for a 19.3 and 10.2 per cent share. 6 Business Environment Index of industrial Production (IIP) - Preliminary estimates at the end of October showed a decline of 0.7 per cent with the manufacturing sector itself declining by 3.1 per cent. The manufacturing of wearing apparel and electronic components were the major industries Prices continue to slump when compared to comparative periods in 2014 for all indices contributing to the decline in the index registering a decline of 58.7 per cent and 31.3 per cent respectively. There was however, some growth registered in major production sectors comprising the index. Chemicals and electricity & gas sub industries registered relatively moderate production prospects at the end of the review period increasing by 4.6 and 3.7 per cent respectively. Producer Price Index (PPI) – Over the review period the Year-on-year (y-o-y) producer price index approximation for the month of October indicated that production prices decreased by 2.1 per cent. All prices within the index registered declines with the exception of other manufacturing and Beverage products which increased by 3.5 and 0.8 per cent respectively. The major fall-off in prices was registered in the Petroleum and Chemical products industry by 9.5 per cent followed by Rubber and Plastics Products (9.3 percent), Fabricated Metal products (8.8 per cent) and the Furniture industry (6.6 per cent). Retail Price Index – At the end of October 2015, y-o-y estimates of the RPI index show that prices in general have decreased by 2.4 per cent. Significant reductions in the fuel and light prices, which decreased by 22.9 per cent and medical & personal care prices which reduced by 15.5 per cent, were the principle drivers behind the reduction of the index. The most notable price increases were recorded in the food industry which increased by 3.7 per cent. This was followed by transport with an increase of 2.8 per cent and alcohol beverages by 2.2 per cent. 7 APPENDICES Commodity prices (Oils) 1,500 1,200 900 600 300 - Coconut oil Palm oil Soybean oil Soybeans Commodity prices ( Energy and Non energy) 140 120 100 80 60 40 20 0 Energy Non Energy Commodities 8 Commodity prices (sugar) 0.65 0.5 0.35 0.2 0.05 -0.1 Sugar, EU domestic Sugar, US domestic Sugar, World Commodity prices (meats) 8 7 6 5 4 3 2 1 0 Meat, beef Meat, chicken 9 Meat, sheep Commodity prices (Metals and Minerals) 60000 50000 40000 30000 20000 10000 0 Jan- Jan- Jan- Jan- Apr- Jul- Oct- JanMar- Apr- May- JunDec Dec2 Dec Mar Jun Sep Dec Mar 15 15 15 15 2012 013 2014 2014 2014 2014 2014 2015 Jul- Aug- Sep15 15 15 Zinc 1950 1910 2161 2026 2071 2311 2235 2080 2029 2213 2282 2082 2001 1808 1720 Tin 211262228321899226362314621915198981837017422159011580415065150721516415453 Nickel 1754815032168931466118468185841586014393137561283113511128251141310386 9938 Lead 2065 2140 2095 2101 2097 2182 2001 1810 1792 2005 1992 1830 1763 1704 1684 Iron ore 128 Copper 7962 7332 6863 7030 6795 6996 6632 5833 5940 6042 6295 5833 5457 5127 5217 135 97 120 103 90 74 63 58 52 60 63 52 56 57 Aluminum 2023 1847 1867 1709 1800 1990 1970 1802 1774 1819 1804 1688 1640 1548 1590 Aluminum Copper Iron ore Lead Nickel Tin Commodity prices (fruits) 1.20 1.10 1.00 0.90 0.80 0.70 0.60 Bananas, EU Bananas, US 10 Oranges Zinc Commodity prices (cotton) 2.5 2 1.5 1 0.5 0 Cotton 11 Commodity prices (Grains) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% JanDec 201 2 JanDec 201 3 JanDec 201 4 Jan- AprMar Jun 201 201 4 4 JulSep 201 4 Oct- JanDec Mar Mar Apr- Ma Jun- Jul- Aug Sep Oct- Nov Dec 201 201 -15 15 y-15 15 15 -15 -15 15 -15 -15 4 5 Wheat, US SRW 295 277 245 264 264 214 239 223 219 210 201 205 207 188 194 206 203 192 Wheat, US HRW 313 312 285 297 322 263 258 239 231 223 215 210 197 180 173 173 177 174 Rice, Vietnam 5% 434 392 407 391 389 435 414 363 361 354 351 349 346 340 326 342 354 371 Rice, Thailand A1 525 474 425 427 398 449 428 416 411 400 387 376 390 378 360 369 366 360 Rice,Thailand 25% 544 473 382 375 351 400 402 397 392 384 368 365 376 362 347 362 359 356 Rice,Thailand 5% 563 506 423 444 393 433 421 417 410 399 381 376 392 373 357 373 368 363 Maize 298 259 193 210 214 174 174 174 174 172 166 167 180 163 166 171 166 164 Barley 240 202 138 130 138 130 153 189 189 206 195 203 214 203 184 187 188 186 Barley Maize Rice,Thailand 5% Rice,Thailand 25% Rice, Thailand A1 Rice, Vietnam 5% Wheat, US HRW Wheat, US SRW 12 13