Thursday 6th March, 2008


US recession?

Economists conclude T&T has little to fear

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President of the T&T Manufacturers’ Association Karen de Montbrun, left, with Finance Minister Karen Nunez-Tesheira at the La Boucan Room of the Hilton Trinidad and Conference Centre on Tuesday.



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It’s regarded as a truism in economic circles—the saying that when America sneezes, the rest of the world catches a cold.

Minister of Finance Karen Nunez-Tesheira says this is no longer the case.

Addressing a seminar “US Recession—Implications for T&T’s Economy” last Tuesday, Nunez-Tesheira said this might have been true some ten years ago, but the burgeoning economies of India and China have dramatically changed the nature of the global economy.

Although the US is responsible for 27 per cent of the global economy, Nunez-Tesheira said, “A case may certainly be made that the global economy is less vulnerable today to changes in the US economy than it was a decade ago. The World Bank and other financial analysts opine that slow growth in the US and other high income countries will lead to weaker but still solid developing country growth even if there is a recession in the US.”

Indeed, Nunez-Tesheira said that, “a slowdown in advanced economies may well serve to moderate some of the global economic tensions particularly those related to rising commodity prices and global imbalances.”

Likewise, she said the local economy is far more resilient and better able to withstand external shocks than at any other time in the country’s history.

Nunez-Tesheira said that the local economy had more than doubled in size over the last five years from about $55 billion in 2001 to about $132 billion last year. She said external public sector debt has declined and the country’s external current account surplus averaged 17 per cent of gross domestic product (GDP) over 2002 to 2007, and gross official reserves—which represented six months of import cover in 2002—now represented ten months of import cover.

However, she said, “The Government recognises that a sustainable slowdown in the US economy may have an adverse impact on bilateral trade and investment flows for T&T and may indirectly impact on our economy through its effects on other Caricom countries.”

She said that the US is T&T’s largest trading partner, accounting for 60 per cent of the country’s total exports and 25 per cent of its imports.

She added that the top five exports to the US between 2005-2007 included liquefied natural gas (LNG), crude petroleum, ammonia and methanol.

“Persistent and strong energy demand even in the face of a slowing US economy and rising commodity prices suggests that impacts originating from these sources are not likely to be overly onerous in the short term.”

And she noted that while the energy sector has been the driver of the T&T economy, many of the other sectors have performed well and exhibited robust growth in the recent past.

The seminar at which Nunez-Tesheira spoke was organised by the T&T Manufacturers’ Association (TTMA) in conjunction with RBTT Bank and was held at the Hilton Trinidad and Conference Centre, St Ann’s.

In her welcome and opening remarks, TTMA president Karen de Montbrun said trade would be affected by a recession in the US. She said a sustained slowdown in the US could cause a fall in demand for this country’s exports and this coupled with imported inflation could result in an expansion of the trade deficit for the non-energy sector, particularly the manufacturing sector.

Observing that the region is the traditional market for T&T exporters, de Montbrun said Caricom countries would suffer and a reduction in Caricom’s real effective purchasing power could implicitly lead to a fall in demand for T&T’s goods supplied to Caricom.

Economist and consultant Dr Trevor Farrell said that in the short term—between one to two years—there will be “little impact” on the overall economy from a recession in the US. However, he said that in the short term individual firms and households can experience “significant losses” as a result of a US recession.

He said his view was based on history and analysis.

Dr Farrell said there had been ten recessions in the US since 1945 and there had been no correlation between recessions in the US and economic performance in the T&T economy. He added that during one such recession—between 1973-1975 the longest of the post-war recessions in the US—the T&T economy, along with those of oil exporting countries, experienced a boom.

Adding that the past is a reasonably good guide to what is likely to happen in the future, Dr Farrell said, “History often, but not always, repeats itself.”

He said the medium term—three to five years—could be a different story.

He defined a recession as two successive quarters of negative growth, characterised by rising unemployment, falling output, falling demand and decreases in capital expenditure all in a vicious downward spiral.

He said most recessions in the US last a few months, although the longer term effects can last for years.

Dr Farrell said there are three distinct economies within the T&T. He said one is the energy economy and, although it is the motor of the whole economy, it has very little to do with the domestic economy.

He said the second is the domestic economy which is where the country’s 15,000 businesses are involved, and the third is the regional economy.

He said the business sector participates in the domestic sector and some sectors of the regional economy. Dr Farrell said the regional economy is driven by exports to Caribbean Community (Caricom) countries and, over the last ten years, by direct and portfolio investment.

He said the energy economy is driven by price, production, volume reserves, tax yields and comparative costs. He said of these factors, developments in the US economy are likely to effect price.

He said it was possible that a significant fall in demand for oil could see a reduction in prices for energy products and affect the mechanism.

However, he said that was not likely to happen in the short term because it is not easy to switch from oil and gas to another energy source in the short term.

Economist Mary King doubted that there would be a recession in the US. She said while the subprime mortgage crisis had affected international banks which were holding bonds and weakened the US dollar, the inherent productive capacity of the US economy had not been damaged.

King, the principal of her own firm Mary King and Associates, said the US is not facing a recession or economic collapse but is restructuring its economy.

She said it was the prevailing view among the major US investment banks that a recession was not likely. She cited Bear Stearns as concluding that because of regulatory intervention by the US federal Reserve and a heavy monetary stimulus from the Government, the risk of a recession in the US was low.

She said Bear Sterns’ opinion was that the US economy had suffered a second quarter slowdown and had skirted a recession.

Mary King.







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