Economy slowing down but not in recession, says Trinidad

Published: Wednesday | August 19, 2009

Linda Hutchinson-Jafar, Business Writer

Ewart Williams, governor of the Central Bank of Trinidad and Tobago, says the economy contracted 3.3 per cent in the second quarter but was not in recession. - File

Trinidad and Tobago's economy this year could record its first annual decline in gross domestic product (GDP) in 16 years as the energy-driven system continues to show a marked slowdown in major areas.

But central bank Governor Ewart Williams said although there has been a sharp slowdown in economic activity, it does not suggest that it has reached crisis proportions or that the country was in recession.

"Whether the current situation is a recession or a slowdown is less important than making sure that we adopt the right policies for our specific circumstances," he told the local media last week in response to headlines that the country was heading into a recession.

Williams said the United States and other advanced countries may be able to spend their way out of recession because of significant spare capacity and an abundance of other productive factors waiting to be mobilised.

But most developing countries, including Trinidad, lack that luxury, he added, and need to be more aware of the implications of demand stimulus for inflation, foreign exchange, public debt and medium-term sustainability.

"Accordingly, we need to be more circumspect and more targeted in responding to the current slowdown, since the correct response will depend on whether we are going through a temporary cyclical event or structural change," said Williams.

The banks' latest economic bulletin showed that the energy-driven economy, declined by 3.3 per cent in the first quarter of 2009.

Activity in the oil and gas sub-sectors contracted by two per cent.

No sign of turnaround

In the April 2009, Monetary Policy Report, the central bank envisaged growth for 2009 in the range of zero to one per cent.

"We are still reviewing our projections, but all indications are that there would be a decline in real GDP for 2009 as a whole. If this occurs, it would be the first annual decline in real GDP since 1993," Williams said.

Real GDP grew by 3.5 per cent in 2008.

Energy GDP grew 0.4 per cent, while non-energy sectors grew 4.8 per cent.

There are no signs that the Trinidad economy is beginning to turn around.

Local sales of cement for the first six months of 2009 were seven per cent lower than in the first half of 2008, while median house prices fell by 6.7 per cent in the second quarter of 2009.

In terms of short-term economic prospects, the central bank governor said the number and value of new real-estate mortgage loans approved in the first half of 2009 were 29 per cent and 20 per cent lower than in the first half of 2008.

New-vehicle sales declined by 41 per cent in the first half of 2009 compared to the similar period in 2008.

The number of job layoffs continued to rise in the second quarter of 2009.

According to the data collected by the Ministry of Labour, close to 1,000 persons received retrench-ment notices between April and mid-July.

Unemployment could climb

Williams also warned that there is a risk that unemployment could climb to six per cent to seven per cent.

International food price reversals and uncertainties regarding agri-cultural output could keep inflation above the targeted six per cent.

He said lagging consumer and business confidence could make for a slow recovery in private sector credit demand.

Looking at policy options inthe current economic climate, Williams said preventing unem-ployment from getting out of hand is a key policy objective while there is also considerable room for interest rate reduction if inflation continues to decline.

He also saw room for a small fiscal deficit of around two to three per cent of GDP in the 2009/2010 fiscal year.

"This deficit will still imply difficult fiscal choices as economic infrastructure needs remain large; large subsidies have become embedded in the budget," he said.

"Several large ongoing projects need to be completed."

But Williams also noted that room for new projects and new expenditure programmes was limited.

He suggested greater focus on the factors restraining private sector expansion to mitigate them, saying there was need for business facilitation programmes, assistance in seeking out new markets; support for productivity enhancing improvements; as well as research and development funding and joint ventures deals.