Following the recent release of weaker than expected economic data, Anchor has revised our final 2016 Bermuda gross domestic product forecast from 1.8 per cent to 0.8 per cent and our estimated 2017 forecast from 3 per cent to 2 per cent. We continue to believe that the island will experience a large, one-quarter spike in activity due to the America’s Cup, but the second half of this year will be impacted by the departure of several hundred people who have come to island related to the AC event.

In our March quarterly report, we noted: “Longer-term growth will be primarily dependent on the change in the workforce and/or productivity enhancement. Therefore, immigration policies and business mix changes will have an important impact. Recent trends lead us to believe that the workforce population has declined over the past 12 months which is a concern for overall economic activity.”

The latest retail sales data and international business income trends indicate that the underlying growth of the local economy is weaker than we expected.

In an effort to provide more timely GDP information the Bermuda Government has been publishing quarterly GDP data using the expenditures approach. The official government annual GDP figures are usually published in September based on the income approach. While the expenditures approach has historically shown some deviation from the official annual GDP figures (especially in 2015), the information has been directionally correct and does correlate with the official figures. The expenditure based approach shows that economic growth was flat in 2016 and indicated two quarters of contraction in the second half of the year.

The table shown is a historical reconciliation of the official GDP number from the trailing 12-month (T12M) number based on the expenditures approach. The first table is real value and the second table is the year-over-year (YoY) number. The 2016 number for the income is based on our current estimates.

What has changed?

The Bermuda freight data continues to indicate robust growth with eastbound container volumes rising 5.9 per cent over the past 12 months but much of this increase is related to the America’s Cup. Refrigerated cargo has risen a more modest 2.9 per cent over the same period.

Some other indicators are not as encouraging. Retail sales volumes are now flat in the latest 12 months through February with volumes being negative in four of the past five months. Belco also recently reported that electricity sales volumes decreased 0.8 per cent in 2016.

We believe that the biggest challenge for the local economy is the decline in employment in the important international business (IB) sector. The sector has lost 929, or 19.5 per cent, of its high-paying jobs since 2007 and after stabilising in 2014 another 100 jobs have left the island in the past two years.

IB employment income declined in 2016 for the first time since 2012 according to government statistics. We are still apprehensive about a new wave of mergers in the IB sector that could pressure this further over the next year as industry dynamics in the insurance sector remain frustratingly weak.

In summary, we have lowered our Bermuda economic growth forecasts as we remain concerned with Bermuda’s potential growth rate in the medium term and its growing “denominator problem: less people paying for escalating liabilities”. Bermuda’s largest industry, insurance, faces growing challenges and the island is not immune to the impact of further technological innovation and globalisation.

To be more constructive on the longer-term potential of the island we would like to see a proactive long-term growth strategy, which needs to include a more comprehensive immigration policy and less emphasis on taxing labour and services, which is making the island less competitive in attracting new business.

Tax policies should continue to focus on truly broadening the tax base and not compounding rates on the current payers. A continued positive trajectory of the hospitality sector after the America’s Cup festivities is also important. The advancement of various tourist initiatives and the airport development project will add to investment growth over the next few years but this needs to translate into sustained growth in overall tourism spending in Bermuda.

Nathan Kowalski CPA, CA, CFA, CIM is the chief financial officer of Anchor Investment Management Ltd and the views expressed are his own.

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