The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The US could tip the Bahamian economy back into recession within eight months unless Washington reaches a deal by tonight to avert its so-called ‘fiscal cliff’, a former finance minister has warned.

With legislators on Capitol Hill still at an impasse as Tribune Business went to press last night, James Smith said the Bahamas’ immediate term growth and economic prospects largely rested on whether the US could reach an agreement to avoid $480 billion in tax hikes/spending cuts.

The CFAL chairman said the Bahamas’ would, in 2013, enjoy more than the 2 per cent gross domestic product (GDP) growth it had seen in 2012 provided the US avoided such an outcome, which would see taxes on the average family rise by $2,000.

Going over the so-called ‘fiscal cliff’ would likely damage US consumer confidence and depress aggregate demand, given that disposable incomes will have reduced. Many pundits have predicted that it could drag the US back into recession.

And, given that the Bahamas is so inextricably linked to the US, with 80-85 per cent of its stopover visitors originating from that nation, there is every likelihood that such a ‘chain reaction’ would take this country back into an economic contraction.

Analysing the implications for the Bahamas should the ‘worst case’ scenario come to pass, Mr Smith told Tribune Business: “I think it would have a direct impact on our tourist arrivals.”

Noting that there was often a ‘lag time’ between an ‘external shock’ occurring and tourism bookings being impacted, the former Central Bank governor added that if Americans were feeling less confident about their futures, or saw a reduction in disposable income, they would likely reschedule vacations planned for the 2013 second quarter onwards.

These were likely to be postponed, at best, for at least a year, although it was possible that the ‘fiscal cliff’s’ effects had largely been priced in.

“Some of it has already begun to take effect from last month,” Mr Smith said, adding that the ‘fiscal cliff’s’ emergence was coming at “a bad time” for the Bahamas’ main stopover visitor source markets. Not only was the US north-east being hit by severe weather, it was also still recovering from the aftermath of Hurricane Sandy.

“The hotels are reporting slight increases over last year, but it could have been even stronger still, and if they go over the ‘fiscal cliff’ we can expect some cancellations,” Mr Smith told Tribune Business.

“The preliminary data would indicate that the tax increase is going to really be on the middle income families earning $50,000, $60,000, $70,000. We could really do without another external shock.”

If the US fell over the ‘fiscal cliff’ and tipped its economy back into a recession, Mr Smith said this would impact both tourist arrivals and foreign direct investment (FDI) inflows into the Bahamas.

He added, though, that there was likely to be a ‘time lag’ before the true impact fully manifested itself in the US, given that it would take some months before the tax increase aspect hit home.

As to what this meant for the Bahamas, Mr Smith said: “I think, with a time lag, we’ll probably have very, very limited growth, and see a compression of FDI, a compression of tourist expenditure.

“That backs into slower economic growth and continued high unemployment, which in turn means limited growth in imports and limited growth in the major source of tax revenues for the Government.

“Other things being equal, it will contribute to greater deficits and greater debt. Let’s hope sensible heads prevail in Washington. What happens in the US has a lot to do with what happens here.”

Mr Smith said the US economy appeared to have been on the road to recoveryuntil the ‘fiscal cliff’ issue came along.

“The outlook was certainly a bit more positive, but if they slip back, not just the Bahamas but the rest of the region will see a slowdown in growth, and might fall into recession as well,” he told Tribune Business.

When it came to the Bahamas’ GDP growth prospects for 2013, Mr Smith said there were “many uncertainties” besides the US ‘fiscal cliff’. The sovereign rating downgrade by Moody’s and fragile consumer confidence were other factors, counterbalanced by foreign direct investment projects already in the pipeline.

When compared to the economy’s 2012 performance, Mr Smith said of 2013 prospects: “It’ll be better [than last year] if the US deals with their fiscal cliff issue, but if they don’t then it’ll be back into recession with a lag - of probably eight months. We’ll see it with summer bookings for winter.

“Looking back to 2008, we’re now in the fifth year of sluggish growth, and if you take the negative growth of two years, overall growth over that time is probably less than 2 per cent.”