Projected growth

20130728rawle's business pageThe World Bank has revised its projections for the global economy for 2016.  At the beginning of the year, the global financial institution projected growth of the world economy to be close to three per cent.  However, in more recent times, the Bank has lowered its expectations about the world economy.  Things do not look so bright in several areas of economic activity and these changes have prompted the World Bank to rethink how the global economy will perform this year.  Guyana is linked to the world economy through trade, investment, migration and remittances.  They are all important to the robust functioning of the various structures, but moreso the production, finance and knowledge structures.  One must therefore wonder about the implications of the anticipated slower growth in the global economy for Guyana.  This article seeks to identify the risks that slower growth in the global economy has for the country.

 

Possible domino effect

At the beginning of 2016, the World Bank predicted that the global economy will grow by 2.9 per cent.  That forecast, while positive, was not itself exhilarating.  However, the Bank is now saying that the world economy will likely grow by no more than 2.4 per cent.  In a world where economies are interconnected and feed off of each other for growth and expanding the welfare of their people, one has to be concerned with the anticipated slowdown of the world economy.  Any rate of slower growth is cause for concern.  Very often no country is insulated from the negative effects of a decline in global demand or supply of goods and services.  But the severity of the effects of the downward movement can reach deep into the economies of some countries while for various reasons it escapes others.  Each country has got to be concerned about the source of the problem because of the possible domino effect of falling production, declining employment and reduced income that could occur in its economy.

 

Cause for concern

The cause for concern arises from several factors.  The World Bank has identified sluggish growth in the advanced economies as a contributing factor.  These are primarily the economies of the members of the Organization for Economic Cooperation and Development (OECD).  It has also identified “stubbornly low commodity prices, weak global trade and diminishing capital flows” as added contributing factors.  Like other institutions, the World Bank’s analytic model takes account of developments in each region of the world.  The global economic picture is made up of the aggregate of the situation in each region of the world.  Its analytic framework acknowledges the existence of six regions, namely East Asia and the Pacific, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, South Asia and sub-Saharan Africa.  These are artificial configurations which, if aligned differently, could yield vastly different results for each region.  In this particular exercise, the World Bank does not discuss the US economy and the advanced economies of the European Union as part of any regional grouping, giving further evidence of the artificial character of the regional groups.

Be that as it may, the World Bank feels that most regional economies will experience slow or negative growth.  The following four regions (East Asia and the Pacific, Europe and Central Asia, Latin America and the Caribbean, and Sub-Saharan Africa) fall into that category.  In effect, it sees only two regions likely maintaining a significant upward trend in economic activity and output.  The region of which Guyana is a part is that of Latin America and the Caribbean.  The World Bank projects that the region will grow marginally by 0.1 percentage point over the 2015 period.  Consequently, growth is not expected to reach higher than 3.5 per cent in 2016.  This was one of the better regional performances expected vis-à-vis the other three regions that were not expected to see significant growth.

 

Interconnection

But Latin America and the Caribbean is not the only place Guyana should be looking for an assessment of its economic fortunes. The interconnection between countries is strongest in the area of trade and Guyana must look to the places where it sells and buys most of its products.  The Guyana economy is an open one and international trade plays a critical part in its growth and development.  As at 2015, international trade represented 48 per cent of the gross domestic product (GDP) of Guyana.  Guyana is an export-oriented country and its ability to produce and export depends on its ability to import certain types of goods which are used as intermediate consumption or capital investments in the production process.  This interlocking relationship in Guyana’s production structure is critical to economic progress because Guyana is unable to produce the much needed intermediate and capital goods.  According to trade data published in the Quarterly Bulletin of the Bank of Guyana, the goods that fall into this category represented 72 per cent of the value of goods imported into Guyana in 2015.  With its production structure having such a high dependence on imports, Guyana must pay close attention to what is taking place in the economies of its major trading partners.  The situation of demand and supply in those countries will reverberate through the Guyana economy.

 

Destination countries

It cannot be good news for Guyana when destination countries for its exports are among those in which the World Bank has identified sluggish growth as a cause of poor economic performance.  This situation has consequences for specific items exported by Guyana.  One could take the case of bauxite as an example.  Despite a fall in economic fortunes, bauxite is the third largest generator of export revenues for Guyana since at least 2010.  Bauxite is one of those products that Guyana is unable to utilize at the moment for value-added purposes in its domestic production structure because of its high demand for energy.  The export market is therefore very important for that product.  Guyana exports significant amounts of its bauxite to China, Russia and countries in the European Union.  The World Bank contends that the Russian economy is in deep recession which does not leave Guyana with much hope of seeing increased demand for bauxite in that economy.  This disappointing outlook can also be transferred to China which the World Bank also reports as experiencing a slowdown in its economic activities.  The other markets are relatively small.  If the hypothesis is correct, then bauxite production was likely to be adversely affected.  Under such circumstances, it is necessary to look for alternative markets for bauxite.

Sugar, rice and seafood go in major amounts to the UK, US, Japan and several Caricom countries.  The first three destinations are members of the Organization for Economic Cooperation and Development (OECD) and their economic conditions are discussed under the heading of advanced economies.  These markets are important too for Guyana’s precious stones and metals, bauxite, forestry products and beverages.   While not as strong as they would like, the advanced economies are expected to experience positive economic growth in 2016.  That is good news for Guyana which relies heavily on the UK and US markets in particular for most of its international trade.  Based on the foregoing scenarios, Guyana should be able to maintain an overall positive situation with respect to export volumes, even though sugar may buck the trend for its own cause.

 

Unknown variable

The World Bank has identified stubbornly low commodity prices also as a cause of slower global economic growth.  Guyana, after 50 years of being an independent country remains a producer and exporter of largely primary commodities.  With the

exception of rum and smaller amounts of other manufactured products, Guyana sells primarily unprocessed minerals, forest and seafood products.  It is a primary commodity producing economy.  The price for many of the products that it exports is down significantly.  Price for agricultural products is down three per cent from December last year.  The price of many raw materials is down two per cent while the price of gold is down about one per cent from December last year.  The lower prices might lead to an increase in demand for the products but supply might not be able to respond in time for the country to take advantage of the lower prices.  Further, the risk for Guyana is that no one knows what the profit expectations are of the private investors.  This unknown variable could lead to a reduction in production and a layoff of workers.

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