Business

Former CB governor: Bahamas could benefit from a US recession

The Bahamas could actually benefit from the looming stagflation-induced recession currently threatening the United States, a former Central Bank governor said yesterday, noting that the presumed economic fallout expected locally may not form.

Stagflation is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. James Smith, who is also a former minister of finance and currently heads the Davis administration’s private sector debt advisory committee, said the same fears of a negative trickle down effect happened during the 1970s oil crisis, but the opposite occurred.

“This happened in the 1970s around another oil crisis, during the [Arab-Israeli] war, and there was this fear that there would be a cutback in travel, because I think back then they were also highjacking planes. But instead of having a really bad year, we had unusually high visitor arrivals because Americans were traveling closer to home. We hope something like that happens, but I’m only saying that it’s quite likely that the expectations of a fallout may not necessarily form. We just have to keep watching the monthly figures and from all reports gathered from the large hotels, they are reporting excessively high occupancies,” Smith told Guardian Business.

“The local population will indeed be adversely impacted because we are importing all of our inflation, so we will see higher prices. But the country itself might be in a better position – and it has already been done – to reduce the costs, like the rollback on customs duty for instance, and there might be an increase in allocations for social services. Those are the policy decisions that would have to be taken over the next several months.”

Last week, in an effort to stave off its highest level of inflation in 40 years, the United States’ Federal Reserve increased the federal fund rate by 0.75 percent, prompting economists to predict a rising chance of a recession in the next 12 months.

It has been forecast that US economic growth will slow over the course of this year and a shallow recession will occur in late 2022 and early 2023, according to business and research organization The Conference Board.

Historically, when the US falls into recession, The Bahamas follows within a year’s time.

But, Smith said, the predicted recession in the US could benefit The Bahamas, in that American travelers may rethink longer, more expensive trips across the Atlantic and opt for a closer vacation.

“The impact is actually global, and I think this distinguishes it from anything we’ve ever seen in the sense that the culmination of the war in Ukraine, the impact of oil and energy prices, supply chain interruptions and excessive spending during the COVID era – not just in the US, but around the world – basically the supply and demand is out of whack. There’s likely to be this general rise in prices around the world,” Smith said.

“In The Bahamas, the rise in prices usually means people have to cut back. Now the one difference from our point of view in The Bahamas, because we’ve seen something like this before, travel costs will increase because of the cost of energy and the price of plane tickets, et cetera. But at the same time people have been pent up for two years and are still wishing to travel, so they may compensate by taking shorter trips. So, the Americans who were planning to go to Europe might say they can’t afford to go to Europe, but can afford to travel to the Caribbean. So, you might have that kind of adjustment taking place in the pocketbook of the family.

“That’s why I think it’s very difficult to take a straight-line analysis that prices are going up everywhere and salaries and wages have not, and therefore there will be cut backs. That happens in general, but when you are dealing with a specific sector like travel, there could be an overall reduction in travel but in our case, it may be that people are traveling less distances and we might end up getting more.”

Prices are expected to continue rising during the course of 2022. The International Monetary Fund (IMF) has forecast inflation will rise to 7.3 percent by the end of this year.

The Central Bank reported that during the first quarter of 2022, prices rose by 3.4 percent.

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Paige McCartney

Paige joined The Nassau Guardian in 2010 as a television news reporter and anchor. She has covered countless political and social events that have impacted the lives of Bahamians and changed the trajectory of The Bahamas. Paige started working as a business reporter in August 2016. Education: Palm Beach Atlantic University in 2006 with a BA in Radio and Television News

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