TT recession: not yet

Such a situation requires information to be made available not only to the new Minister of Finance and his advisers, but to a concerned public who must be convinced that those who find themselves responsible for making the economic decisions that affect their lives know what they are doing. The population is now relatively better equipped with analytical skills (given the emphasis on education), and would require convincing of any policy decision.

A quick browse by the public of the CBTT website will reveal that most of the information is dated, at best, 2014. To the new Minister of Finance who needs our support it is necessary to correct this anomaly quickly.

It must first be stated that from the very little data that is available, the country has experienced two successive quarters of economic decline, and there appears to be some acceleration in the decline of GDP. While a cause for concern, this does not make a recession.

Although the international community views a recession as three quarters of successive fall in GDP, for developing countries such as Trinidad and Tobago, the yard stick that has been used in the past to determine if we are in a recession is five quarters of economic decline.

We have only had two quarters of decline.

This situation has implications for the budget and the decisions of the new Minister of Finance who will be very concerned with first stabilising the economy, and then halting the economic decline, which should be followed by charting a course for economic recovery and growth. This is going to take time.

The new Minister of Finance finds himself with an economy in decline and a Central Bank Governor engaging in contractionary monetary policy. This is not an accommodative monetary policy stance as the Bank’s monetary announcement claims; readers can do a web search for themselves to verify what type of monetary policy stance this is. Is it really appropriate to have raised interest rates for 14 months while the economy has gone into decline? Is the risk from portfolio realignment greater than the risk to economic growth? Where is the data to support such claims? There is the temptation for the Minister to engage in fiscal injections assuming there is fiscal space (the difference between the current level of public debt and the level of debt that is sustainable and manageable). The challenge the Minister faces is that fiscal injections can lead to pressure on the foreign exchange market and the exchange rate.

The energy sector accounts for close to 90 percent of the foreign exchange earned. A fall in the price of oil and gas is expected to reduce level of foreign exchange coming into the country. This has to be of concern to the Minister, his advisors and all of us.

The Central Bank Governor indicated that he was adopting forward guidance, a communication instrument used by CBTT which would convey its monetary policy stance going forward, conditional on CBTT’s assessment of the economic outlook. This works if the analysis turns out to be correct.

When, as is the case with the last monetary policy announcement, the analysis is suspect it erodes confidence in what CBTT says.

Inflationary pressure, which was anticipated and for which an increase in the repo rate was meant to address, never materialised. Such forward guidance failure raises doubt about believing CBTT’s analysis. One is left to wonder why the CBTT is talking about headline inflation when monetary policy can have no effect on the price of agricultural products. It is core inflation that should be the focus of attention and since there has been no pressure from core inflation, why has the repo rate been raised for 14 months? Bear in mind that the US has not moved its policy rate; what narrowing of the policy rates is CBTT referring to? CBTT should be telling the population what effect its contractionary monetary policy stance is having on consumer lending, business lending and real estate lending.

Certainly raising interest rates is going to raise borrowing cost and ultimately cost of production. How is this helpful to the economy at this time? One can only hope that the monetary policy stance will not conflict with the economic objectives of the government.