With the pandemic now in the rear-view mirror, the headlines of summer 2023 were dominated by climate change (record temperatures, tragic fires and flooding depending on geographical location), on-going geo-political uncertainty (the Ukraine war, as of Oct 7 the Israel - Hamas War and tensions with China) and continued questions over the health of the global economy. The British Virgin Islands held well-contested general elections last April resulting in the Virgin Islands Party winning six seats and eventually securing the election when the opposition failed to form a coalition government.
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At a time when voting rights are under threat in so many countries, and with less than 50% of the world’s population living in a “democracy” (source: The Economist Intelligence Unit), international observers reporting on the election concluded “that the British Virgin Islands Election Day was orderly, peaceful and well-run, voting on Advance Polling Day proceeded smoothly, and that the legal framework in place offers a sound basis for democratic elections.” It is a credit to the BVI, and in particular to the Office of the Supervisor of Elections and the many volunteers, that the international observers were able to report so positively. While many economists predicted that the major global economies would have faced a recession in 2023, the turmoil of 2022 from Russia’s war in Ukraine and the impact of rising inflation certainly slowed economic growth. Central banks persisted with tight monetary policy, targeting inflation by raising interest rates. The US Federal Reserve (The Fed) raised rates in late July 2023 to a range between 5.25% to 5.5%.
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With inflation in the United States easing to 3% for the year in June 2023 (compared to 9% in June 2022), economic forecasters have now turned their attention to when interest rates will begin to fall. Intervention following the 2007 financial crash focused on QE (quantitative easing) which resulted in a slow economic recovery, whereas the fiscal stimulus during the pandemic, resulted in a far quicker rebound in the economy, one where supply chains could not keep pace resulting in inflationary trends.
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While the global economy grew by 3.1% in 2022, despite head winds from increasing inflation and the shock of Russia’s invasion of Ukraine which impacted both energy and food costs, it was forecasted to be weaker in 2023 as growth slowed to 2.1% (source: World Bank “Global Economic Prospects”) before a predicted tepid recovery in 2024. The Fed has a stated objective of returning inflation in the USA to 2% which is unlikely until mid-2024, so interest rates are likely to remain at current levels for at least the next year while The Fed keeps an eagle eye on the longer-term inflationary trends. The banking sector stresses, while limited to more specialist banks and with Governments quick to intervene, has not created a wider economic crisis, although crypto currency markets have been in turmoil particularly after the collapse of the FTX exchange in late 2022.
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Graph 1 shows the relationship between the average inflation rate in the Caribbean for select islands and the BVI from 2015 to 2023 and the changes to interest rates by The Fed over the same period.
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In China, the economy has slipped into deflation, with the world’s largest real estate company, Evergrande, filing for Chapter 11 protection in the US. Contrary to other major economies, China is reducing interest rates in order to boost economic growth, as the economy has struggled after the ending of the strict pandemic controls. In the US all eyes are now focused on the 2024 Presidential election. While Donald Trump remains the Republican front runner, the number of indictments against him could interfere with his presidential campaign, if he receives the Republican Party nomination, although polls indicate that his popularity only increases amongst Republican voters each time he is cast against the “Establishment”.
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President Joe Biden will be looking for strong economic indicators in the run up to the election, particularly as his ability to pass legislation is hampered by Republican control of the House of Representatives. It is a given that the 2024 presidential election will be hotly contested, particularly as contentions from the last election are still being worked out. The result of the election could also disrupt geopolitics, as a Trump presidency would have significant implications not just for NATO and the continued support of Ukraine in the war against Russia, but also for the simmering relationships with China among others. President Biden’s foreign policy for the next several months will no doubt be dominated by the tragic events in the Middle East and attempts to reset relationships with China.
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The Hamas attack on Israel on 7 October unleashed a ferocious response from Israel. While the reasons for this attack are being debated, and possibly linked to Iran’s opposition to the normalisation of diplomatic ties with Israel by major regional players including Saudi Arabia, the USA has led attempts to contain the conflict along with regional powers. This will be a major test for Biden. The US-China mini-summit in mid-November represented a rapprochement following several years of deteriorating relations as China’s position on the world stage is established. Human rights, trade wars, intellectual property, election interference, geopolitical tensions in Southeast Asia (Taiwan and South China Seas) were all topics for discussion. Climate change issues and how to tackle fentanyl trafficking were both points for agreement while military communications set to resume. However, much remains on the table for further discussions and neither China nor America are likely to alter their current positions. Across the Atlantic, the war in Ukraine has had a direct impact on the Eurozone, which had to quickly wean itself off an over reliance on Russia as a primary source of energy in the winter of 2022, avoiding energy shortages helped by an unusually warm winter. Strong labour markets helped the Eurozone avoid a recession in 2023 and although inflation has not fallen as fast as predicted and the economy has stagnated, signs are for the economy to start a slow recovery in the services sector while the manufacturing sector remains flat. (source: Deloitte Eurozone Economic Outlook June 2023). The UK economy has also been slow to see inflation fall, with Brexit limiting the Government’s options to react quickly to changing economic conditions.
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A labour crisis following the emergence from the pandemic was exacerbated by restrictions on foreign seasonal labour which was otherwise in plentiful supply pre-Brexit. While rates in the UK, at 5%, are on par with the USA and likely to remain higher for longer while inflation remains elevated, January 2024 data showed that the inflation in the UK had dropped to a better than expected 3.9%. With the highest inflation rates in the G7 group, the UK has a lot of ground to cover before the economy is seen to have stabilised.
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The Caribbean economy has generally fared well in the post pandemic environment, mainly due to the growth in regional tourism, as islands opened to travellers who were keen to take advantage of the end of restrictions. Stayover arrivals expanded by 76% in the region in 2022 achieving 84% of 2019 overnight arrival levels (source: UNWTO). Preliminary results for 2023 indicated that this upwards trend in tourist arrivals to the region continued through the end of the year. The importance of the US as the leading market for tourism in the Caribbean is reflected in the 2021 total tourist arrivals with 51.5% of all tourists emanating from the US. Visitor expenditure from all markets was about $37 billion in 2022. Six Caribbean destinations (USVI, Dominican Republic, St Martin, Turks & Caicos Islands, Puerto Rico and Curacao) all exceeded pre-pandemic tourist arrivals in 2022 (source: CTO/STR) and it is notable that five of the six destinations are located in the northern Caribbean, reflecting the importance of proximity and direct airlift to the USA. Graph 2 shows the annual percentage change in overnight arrivals between 2016 and 2022 for the BVI compared to select Eastern Caribbean Island destinations (Anguilla, Antigua & Barbuda, Barbados, Cayman Islands, Dominica, St Kitts & Nevis, St Lucia and the USVI). The graph shows the impact of Hurricane Irma on the BVI in 2017 and 2018 (Anguilla and St Martin were also impacted), the rebound of tourism in 2019 before the pandemic closed boarders in 2020. While the BVI was slower to reopen than many islands in 2021, it has shown a substantial rebound in overnight visitors in 2022, albeit from a much lower base.
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