(Central Bank of Trinidad & Tobago March 2017)
Amidst low commodity prices, uncertainty about the full implications of Brexit and the outcome of the US elections, the global economy grew modestly during the latter part of 2016. On November 9, 2016 following the US elections, minor disruptions occurred in some financial markets. However, the negative shocks to stocks, bonds, and currencies were short-lived and stock market indices had generally recovered by the end of the year. The latest available data show that the US economy lost some momentum growing by an annualized rate of 1.9 per cent (quarter-on-quarter) in the fourth quarter of 2016 after expanding by 3.5 per cent in the third quarter, which was the fastest rate of growth in two years. Several other advanced economies, including the UK (0.6 per cent) and the Euro Area (0.4 per cent), recorded modest quarter-on-quarter growth in the fourth quarter of 2016. Towards the end of the year, expectations of rising interest rates in the US intensified in financial markets and, in December 2016, amid improved domestic economic conditions, the Federal Reserve raised the target range for the first time since December 2015. International energy prices also rallied at the close of 2016 following agreement by members of the Organization of Petroleum Exporting Countries (OPEC) to cut oil production within the grouping. In January 2017 the price of West Texas Intermediate (WTI) crude petroleum averaged US$52.5 per barrel compared to US$39.4 per barrel in the first half of 2016.
Among the emerging markets, the economies of Brazil and Russia continued to contract, China’s economy cooled, and India’s remained the world’s fastest growing economy. Russia contracted by 0.4 per cent (year-on-year) in the third quarter of 2016, the smallest contraction in the last seven quarters. In Brazil, lower exports and dampened domestic demand underpinned a contraction of 2.9 per cent (year-on-year) in the third quarter of 2016 compared to one of 3.6 per cent in the previous quarter and 4.5 per cent in the third quarter of 2015. China’s economy expanded by 6.8 per cent (year-on-year) in the fourth quarter of 2016, the expansion being driven mainly by increased government expenditure, bank lending, growth in real estate sales and property investment. Despite declines in private nonresidential investment and exports earlier in the year, India’s economy recorded strong growth of 7.3 per cent (year-on-year) in the third quarter of 2016, up from 7.1 per cent in the previous quarter.
In the Caribbean region, the economic performance in 2016 was mixed. Weaknesses in commodity prices hampered growth in the commodity-exporting economies, while tourism activity increased in the service-based economies. The International Monetary Fund (IMF World Economic Outlook – October 2016) has estimated that the Caribbean region grew by 3.4 per cent in 2016 and will grow by 3.6 per cent in 2017. According to the IMF, the economies of Jamaica, Barbados, and Guyana were expected to post positive results for 2016 while the economic recession in Suriname was expected to deepen. The most recent data show that economic activity in Jamaica increased 2.0 per cent (year-on-year) in the third quarter of 2016, up from 1.4 per cent in the previous quarter, largely owing to increased output from the agriculture, forestry and fishing sectors. In November 2016, the IMF approved a three-year Stand-By Arrangement valued at US$1.64 billion for Jamaica to facilitate the government’s economic reforms. Suriname’s economy was estimated to have declined by 9.0 per cent in 2016, following a decline of 0.3 per cent in 2015. The economy remains fragile on account of the closure of the Suralco alumina plant and the effects of contractionary fiscal adjustment. Suriname shifted from a pegged to a floating exchange rate regime in March 2016 to 4 facilitate the changing terms of trade brought on by low commodity prices. The floating exchange rate regime initially led to an improved external current account balance and greater accumulation of international reserves, but the balance of payments pressures mounted later in the year as commodity prices remained subdued.
The prospects for the global economy in 2017 are unclear partly due to policy uncertainty in the US following the presidential elections in November 2016. Several prospective policies of the new Administration may affect growth in international trade and ultimately global economic growth. In addition, developments surrounding negotiations for the United Kingdom to exit the European Union are evolving slowly. In its January 2017 update of the World Economic Outlook, the IMF projects that global growth will be tepid in 2017. Emerging markets are expected to remain the engine of growth while growth in advanced economies slows. In major advanced economies, growth is projected at 1.9 per cent in 2017, slightly higher than in 2016. High debt, financial sector vulnerabilities, lower levels of investment and slow productivity growth underpin the subdued growth forecast. The UK’s vote to leave the EU is expected to bring about economic, political, and institutional uncertainties and lead to some negative macroeconomic consequences, especially in advanced European economies. Fiscal stimulus is expected to drive US growth, which may influence a further rise in interest rates following the rate increase by the Fed in December 2016.
Growth in the emerging and developing economies is expected to be uneven. China and India remain the mainstay of growth but deep recessions in a few emerging market and developing economies will pull down overall activity. Factors influencing the growth rates of this country group include the generalized slowdown in advanced economies, rebalancing of growth in China from being investment-led to consumption-led, lower commodity prices, worsening risk sentiment and strife in several countries and regions. Following a projected contraction of 0.7 per cent in 2016, the IMF has forecasted growth in Latin America and the Caribbean forecast to reach 1.2 per cent in 2017. However, the improvement for the region as a whole, masks the difficulties that commodity producers continue to face. Further, the Caribbean, in particular, remains vulnerable to uncertainties arising from Brexit and changes in US fiscal, monetary and immigration policies.
In Trinidad and Tobago, production indicators of real economic activity monitored by the Central Bank suggest weaker performances in both the energy and non-energy sectors in the latter half of 2016. In the fourth quarter of 2016 the energy sector showed year-on-year declines in the production of crude oil (4.2 per cent) and natural gas (10.8 per cent). These declines by upstream producers were largely attributed to preparatory work to facilitate the inclusion of new fields by major oil and gas producers and increased maintenance activity. At the downstream end, petrochemical producers were negatively impacted by reduced oil and gas supplies which resulted in lower LNG, fertilizer and methanol production. Petrochemical output contracted by 12.9 per cent while Refining output fell by 8.5 per cent. For the second half of 2016, oil and natural gas production were lower by 7.7 per cent and 15.4 per cent, respectively. Available data suggest that non-energy output may not have been strong in the third quarter of 2016. Construction activity appears to have been subdued as indicated by large declines in local sales of cement and retail sales of hardware and construction materials. The decline in the Index of Retail sales for the third quarter of 2016 also points to marked contractions in distribution activity. However, there was growth in the finance, insurance and real estate sector on account of increased commercial banking activity.
The labour market continued to slacken in the first half of 2016. The unemployment rate increased to 4.4 per cent in the second quarter of 2016 from 3.2 per cent in the corresponding quarter of 2015. While the number of persons with jobs fell by 16,200 persons, a significant decline in the labour force of 8,200 persons resulted in the number of persons classified as unemployed rising by just 8,000 persons over the twelve months to June 2016. The labour force participation rate declined to 60.1 per cent in the first six months of 2016 from 60.9 per cent in the corresponding period of 2015. Job losses occurred in several sectors, including, the Wholesale and Retail Trade, Restaurants and Hotels, Construction, Agriculture and Manufacturing sectors. Meanwhile, labour market indicators for the second half of 2016 were mixed. The pace of job separation may have declined as fewer retrenchment notices were filed at the Ministry of Labour and Small Enterprise Development in the last six months of 2016 from the year-earlier period. However, a large decline in advertised job vacancies 1 suggests that the demand for labour might have weakened.
Domestic price pressures were relatively contained during the second half of 2016, as a result of the dampening effects of the slowing economy, which outweighed inflationary pressures arising from select fiscal measures. Headline inflation remained largely unchanged, while increases in producer prices and the prices of building materials were also restrained over the second half of 2016. Headline inflation, as measured by the Central Statistical Office’s (CSO) Index of Retail Prices (RPI), stood at 3.1 per cent (year-on-year) in December 2016, compared with 2.9 per cent in July but slightly higher than the 2.4 per cent recorded at the start of the year. Several factors, including the depreciation of the domestic currency over the year, changes to the Value Added Tax (VAT) system in February 2016, the reduction in the petroleum subsidy in April 2016 and other tax measures (such as revisions to the business levy and green fund) in January 2016 added upward pressure to local prices. However, weaker aggregate demand due to declining domestic output and weak labour market prospects may have contributed to the slowing of inflation. After nearing double digits in the first half of the year —following the widening of the VAT base — food inflation slowed in the subsequent months driven by declines within the meat, milk, cheese and eggs sub-indices. Food inflation measured 6.7 per cent in December 2016, relatively unchanged from the 6.8 per cent in July but marginally higher than at the start of the year (4.5 per cent). Meanwhile underlying inflation (core) was contained at 2.3 per cent, only 0.3 per cent higher than in January and July 2016.
In the context of lower energy revenue, the Central Government’s fiscal position worsened. The latest revised estimates from the Ministry of Finance show an overall deficit of $7.3 billion (5.0 per cent of Gross Domestic Product (GDP)) on the fiscal accounts for fiscal year (FY) 2015/16 (October 2015- September 2016) compared with an initially budgeted deficit of $2.8 billion and the deficit outturn for the previous fiscal year of $2.7 billion (1.8 per cent of GDP). Provisional data provided by the Ministry of Finance suggest that the central government recorded a deficit of $2.5 billion for the first quarter of FY2016/17. This was financed through domestic borrowing comprising of Government draw-downs on the overdraft facility with the Central Bank and the issuance of a $1.0 billion domestic bond in December 2016. Notwithstanding new borrowing by the Central Government, the public sector debt outstanding declined to $87.4 billion (56.6 per cent of GDP) at the end of December 2016 from $88.3 billion (60 per cent of GDP) at the end of September 2016 owing to repayments on contingent debt.
Amidst weak domestic economic conditions, the Central Bank of Trinidad and Tobago held its key policy interest rate, (the Repo rate), unchanged at 4.75 per cent (where it has been since January 2016). Lending by the consolidated financial system slowed to 3.8 per cent in November 2016 as business credit, consumer credit and real estate mortgage lending softened. Meanwhile, the Central Bank adopted a tighter liquidity management approach in the latter half of 2016, withdrawing $1.2 billion from the financial system via open market operations.
Over the first half of 2016, the external accounts of Trinidad and Tobago registered a deficit of $367.3 million with gross official reserves amounting to US$9,565.7 million at the end of the period. Meanwhile, the current account showed a deficit of US$582.7 million, which was primarily driven by depressed conditions within the energy sector. A decline in exports coupled with a marginal increase in imports led to a deficit of US$114.4 million on the Goods sub-account. Energy sector exports are estimated to have fallen by US$1,340.8 million during the first six months of 2016 to $3,361.2 million as a result of lower energy prices and production. At the same time energy imports climbed by 37.1 per cent to an estimated US$1,556.8 million reflecting an increase in the volume of petroleum imports over the period. With falling inflows from the energy sector, conditions within the domestic foreign exchange market remained tight during the first six months of 2016. In order to support the market, the Central Bank sold US$706.6 million to authorized dealers in the first six months of 2016. The financial account registered a net inflow of US$573.0 million, which was a reversal of the net outflow of US$429.0 million in the similar period in 2015. This was mainly due to net inflows of portfolio investment which occurred primarily as a result of residents reducing their holdings of foreign assets. The change in the gross official reserves for the second half of 2016 suggest a deficit of US$99.9 million on the external accounts, bringing the level of gross official reserves at the end of December 2016 to US$9,465.8 million (equivalent to 10.5 months of imports).
In 2017, the Trinidad and Tobago economy would benefit from the coming on stream of new gas production. Specifically, production from bpTT’s Juniper platform is likely to begin in the third quarter of 2017, which should boost natural gas supplies and the energy sector on the whole. While international oil and gas prices are expected to rise in the wake of the December 2016 agreement by OPEC members to cut production, price increases could be muted by higher shale oil output in the US. Meanwhile, the revival of the non-energy sector, especially construction and distribution activity, could be helped by faster execution of government’s capital expenditure programme. Overall, economic conditions are likely to remain challenging in 2017 as the economy continues to face reduced export earnings, constrained fiscal accounts and rising unemployment.