Bermuda is facing a long and deepening recession that will see more jobs disappear and could see wages frozen or cut for staff in most professions.
Analysts predict it will be 2012 at the earliest before the gloom surrounding our economic fortunes lifts.
Economist Craig Simmons said Bermuda’s situation closely resembles that of Ireland, which had to be bailed out by fellow European Union members, resulting in wage cuts across the board to satisfy creditors.
He said the drop in Gross Domestic Product (GDP) of 8.1 per cent after inflation for 2009 — a record in the last 30 years — is “confirmation” that Bermuda is in bad shape financially.
He predicts that figure is likely to be equally bad for 2010. Premier and Finance Minister Paula Cox admitted the picture looked bleak.
But she said projects such as the new Bermuda hospital and several hotel developments would help revitalize the economy.
She added: “The only way to lift the gloom in tangible ways with significant economic activity.
“No one can guarantee a magic bullet but clearly there is sensitivity and redoubled efforts being taken to assist in keeping Bermudians in the picture.”
Mr. Simmons said the recession is likely to last much longer than anyone, including himself, initially predicted.
He added this means that more jobs will be lost, there will be more mortgage foreclosures and further decreases in spending locally.
It will also mean a shortfall in tax revenue, potential further increases in borrowing and a raise in Bermuda’s debt to GDP ratio — the index used by investors to determine conditions of loans.
The significance, said Mr. Simmons, is that Government will become more beholden to the banks it relies on to prop up the economy through borrowing.
He added: “Ireland is a particularly useful example to Bermuda.
“Because of their public debt problem their creditors are demanding lower wages to make them more competitive. That will help them recover.
“Bermuda will have to go through that process as well. I’m not denying people are having a tough time getting by as it is but a foreign lender is not exactly sympathetic to the working poor.”
Mr. Simmons said it is not overly dramatic to compare Bermuda’s situation with Ireland, which had to be bailed out by loans from fellow European Union governments due to its over-reliance on debt.
He added: “The Irish got themselves into this problem because of an overheated real estate market fuelled in part by inter-national business.
“The situation is not that different. The banks in Ireland made some very bad decisions prior to 2008, as did Bank of Butterfield.”
Mr. Simmons said Bermuda is seeing an increasing number of foreclosures or re-negotiated mortgages.
He warned the figures show little sign of recovery any time soon. Mr. Simmons said: “We have just lived through 2010. We’ve seen the retail figures and they are as bad, if not worse, than 2009. The numbers for the construction industry show double-digit declines again for 2010.
“It looks like the recession will go on for longer than many people, including myself, predicted.
“When this started in 2008, I thought it would be over within 18 months. I was wrong.”
Mr. Simmons predicts it will be 2013 before Bermuda sees any meaningful rise in GDP, the statistical scale for assessing the country’s economic health.
He said this affects the ‘cost’ of borrowing — a political cost in the form of greater interference from lenders on public policy and a financial cost in terms of higher interest rates.
Mr. Simmons explained: “The cost of borrowing is largely based on a country’s debt-to-GDP ratio and more importantly the change in the ratio.
“Even if we never borrowed another penny, Bermuda’s debt-to-GDP ratio will continue to rise for two reasons — GDP will not improve in a meaningful way until 2013 and, secondly, debt comes from spending running ahead of tax revenue. Since 1996 tax revenue has consistently been around 16 per cent of GDP.
“Spending, on the other hand, is driven by political forces which can be immune to economic realities.
“As a result, spending patterns are less flexible because of entitlements, capital projects and interest on the debt.
“We should see the debt-to-GDP ratio exceed 25 per cent by the end of 2011, up from 10 per cent in 2008.”
Cordell Riley, who runs Bermuda Profiles, said a statistical analysis of the figures in the GDP report, released last week, would paint an equally gloomy picture.
He added: “It is the first time in most of our lifetime we have seen anything of this nature. What the figures are telling us is we may not see relief until 2012.
“With tourism you can clearly see a very steep fall. Tourism and the restaurant industry is sinking like a stone. That is not going to change any time soon.”
Mr. Riley said the impact is most clearly felt in job losses.
A drop in GDP means companies across the island are collectively less profitable, making staff cuts inevitable. Between 2008 and 2009 700 jobs were lost, by Bermudians and foreigners.
Mr. Riley said: “The number of jobs fell from 40,213 in 2008 to 39,520 in 2009.
“We will probably see that decline continue for 2010 — perhaps not to the same extent but there will be further jobs lost.”
A “silver lining” that could defy the sober statistical analysis could be provided by the new hospital development and the Park Hyatt hotel.
Mr. Riley said: “Those projects would provide new jobs and to some extent the money is going to flow through the economy.
“If it goes into the construction workers’ pockets, they spend it on groceries and other necessities and it flows into other sectors.”
But Mr. Simmons warned that a Government-financed project like the hospital had limited capacity to boost the economy as the money comes primarily from debt.
He said it would put money in the pockets of those working on it but warned that their own private spending challenges means they are unlikely to reinvest significant amounts in the economy.