“The one-handed economist and the finance minister”
By: Hon Roy McTaggart; Leader of the Opposition
“Give me a one-handed economist!” demanded President Harry S. Truman.
President Truman was frustrated with economic advisors giving him economic forecasts but then hedging by saying, “on the other hand….”
The government, suggested The President, would get more valuable forecasts if they employed one-handed economists.
This anecdote is humorous, but with the serious point that economic forecasting can be notoriously difficult.
However, there are some clear economic trends that we can all see coming. We can also identify some significant threats that we must be ready to deal with, including the twin threats of record-high inflation and the fear of a looming recession.
To start, we know that we are facing the highest price increases in over 40 years! Crippling inflation is being felt in all sectors of our economy, impacting families and businesses. Worryingly, the indications are that this record level of inflation will persist for some time and has been made worse by world events.
Global manufacturing supply chains are still struggling to recover from the pandemic. The Russia/Ukraine war is creating even more disruption. And fuel prices are high and volatile. All of this has created a cost-of-living crisis.
What does this mean:
• The latest government data shows that in the first quarter of 2022, Cayman’s inflation rose at a frightening 11.2% and will continue to rise.
• The main inflation drivers are the skyrocketing housing, utilities, and fuel costs, which rose at a combined rate of over 20%.
• In April, the OECD put the global inflation level at 9.2%.
• In the United States, inflation hit 9.1% in June, the highest level since November 1981. It is expected to remain high for 2022 and into 2023.
In June, I reminded the Parliament that much of the inflation we experience here in Cayman is imported. We are at the mercy of global trends, and the ability of local government to bring prices under control is limited. Nonetheless, the government must do everything possible to help ease the burden on the people.
And the government certainly has options to give some relief to families and businesses who are now struggling and will struggle more over this year and the next. Options that I have written to the Premier about and have shared publicly.
I will explore the cost-of-living crisis and our suggested responses to it in more detail in the second article in this series. However, ahead of that, you can get an idea of my thoughts by watching the following video:
Around the world, major developed economies are raising interest rates to dampen consumer demand and bring inflation under control.
In the United States, interest rates increased by 0.75% on 16 June. A similar interest rate was again done on 27 July, and the Federal Reserve, which sets U.S. interest rates, have indicated that further rate increases are likely by the end of 2022. At home, as we know, Cayman’s banks follow these rate changes, so interest rates here are also rising.
The problem is that these interest rate increases are happening after most major economies have already begun to show signs of slowing down. The likelihood is that higher interest rates will further slow already slowing economies. There are real-world consequences, and we are seeing them play out, with retail sales in the United States falling 0.3% in May 2022. That is just the beginning.
The combined impact of all of this is that economic growth rates are now predicted to be much lower than previously thought. The OECD’s growth forecast for the USA in 2022 was downgraded in June to 2.5% from the 3.7% predicted in Dec 2021. The IMF also cut growth forecasts for 2022 and 2023, with an expected economic worsening in 2024.
These forecasts of lower growth over the next two-plus years are fuelling fears that the United States, and other developed economies, will face a recession. Indeed, some economists are suggesting that the United States is already in a recession.
The S&P 500 US stock index fell by 20.6% in the first half of 2022 in response to those fears of recession.
Consumer confidence in the United States is declining and fell to a 16-month low in June 2022.
These factors further impact consumer spending, especially discretionary spending for travel, affecting our tourism market. This puts even more pressure on families and businesses as we work to restore our economy and rebuild our tourism sector. In summary, our people, businesses and government will likely face some very challenging times.
In his budget presentation last November, the Minister for Finance had forecast 5% growth for Cayman for 2022, and 3.2% over 2023-2025. A reasonable forecast, if only we were in reasonable times.
In presenting the Oppositions budget response back in November, I asked the finance minister about the risk of inflation:
“how will the government manage risk and uncertainty in public finances as we continue through these troubled times? It is not just COVID that presents a significant risk to these Islands.
Only a couple of weeks ago, the United States reported that inflation had hit 6.2%, its highest rate since 1990. We all know that inflation in the US will mean inflation in Cayman. We see that already in the prices at the gas pumps, utility bills, and grocery stores.
Businesses will see it as the prices of materials rise. Government will see its own costs rise significantly and if its forecasts are fixed by a two-year budget that has not addressed the issue, it will find financial challenges ahead.
Inflation often hits the poorest and most vulnerable in our society hardest, Mr Speaker. As costs rise due to inflation, so must government support for our people”
That was my warning to the Government on November 29th last year.
The Finance Minister’s growth forecasts are now shown to be ‘very ambitious’ considering what is happening in the global economy.
There are steps that the government should take to help support our future economic growth. To start, the government must recognise that they have got things wrong and act now to avoid looming troubles and protect our Islands and people from undue economic despair.
In the third article in this series, the Deputy Leader of the Opposition, MP Joey Hew, will outline the steps we believe the government must take to navigate a possible recession and steer Cayman towards future sustainable levels of economic growth.
Sustainable levels of growth that will create future jobs and opportunities for our young people. However, for young people to take up these opportunities and achieve their full potential, we need to continue, and accelerate, the improvements underway in Cayman’s education system.
One of the significant areas of agreement between the Progressives Opposition and the PACT Government was regarding education policy. From early in the very formation of his Government, Premier Panton made clear he would continue the education policies set by the previous Progressives-led Administration. He even maintained the previous Education Minister in the post to ensure continuity.
The reason for the Premier’s expediency was clear. The reforms driven forward by the last two Progressives-led administrations are working. The government’s independent Office of Education Standards has reported that Cayman’s schools are improving. The results achieved by Caymanian students are getting better. The Premier also acknowledged this in a statement to Parliament.
We need to continue that momentum of improvement, not change tack and disrupt a system currently moving in the right direction.
However, the Progressives believe that more must be done to accelerate the rate at which the levels of educational attainment are improving. In the fourth article in this series, our Shadow Education spokesperson, Barbara Conolly, will explain the steps that Cayman can take to give our students the best chance of future success.
The Progressives left a track record of sound financial stewardship and robust public finances despite the effects of the pandemic. Those solid public finances, with much-reduced debt, allowed us to ride out the pandemic in a better place than most other countries in the region and the world.
However, as already said, it was evident when the government presented its budget last year that it contained significant risks. In my response to the budget, I warned of those risks. Risks that have since been compounded because Cayman’s economic prospects look significantly different from those on which the government’s budget was predicated. But the government has said little about this despite my asking them to reassure the country.
Throughout this article, I have tried to heed President Truman’s words and not say, “on the other hand….”. At a time of the twin threats of skyrocketing inflation and fears of a looming recession, our people deserve clarity, and they are not getting it from the PACT Government.
Our people also deserve a government willing and capable of taking action needed in the face of those twin threats. As an Opposition group, we cannot deliver those actions directly, but we will continue to do what we have been doing. To stand up for what our Islands and our people need, and we will continue to press the government to act.