Introduction
If nothing else President George Bush is an incorrigible optimist. And on this occasion it is not about the Iraq War that defies costing in the sense that by the time this column appears two days after its submission the cost has gone up by more than US$650 million dollars, or by that much more than the half a trillion spent in the five years since the US invaded that country. It is about the state and outlook of the US economy which some say is already in a recession while others say in language more suited to diplomats that the economy is “moving sideways.”
What effect does the state of the US economy have on the rest of the world and more directly how will it affect us in Guyana? The answer to these questions is complicated by one further uncertainty – the presidential elections later this year. All the signs point to a race involving Senators Barack Obama for the Democrats and John McCain, a seasoned campaigner and maverick, for the Republicans. Obama is relatively new to foreign policy and his external connections have been mainly Indonesia where he spent part of his early life and Kenya, the country of his father.
Obama v McCain
Obama has made exit from Iraq a major plank of his campaign commitment, and assuming that he wins, getting out of Iraq may be far more complicated than he believes and resolving that may very well take the better part of a year. Any policy towards the Caribbean will be wrapped up in the wider Latin American question and the Free Trade Area of the Americas (FTAA). For all the support he has received from the Caribbean, he is unlikely to give our region any kind of priority.
John McCain, on the other hand, has strong foreign policy credentials but these have been manifested mainly towards Europe, Asia and the Middle East, including his unwavering support of the Iraq War. Regardless of who wins, unless that person appoints someone with clout and a genuine interest in the Caribbean, the region will not receive much attention in the first year or two of the new presidency.
Exchange rate
Yet what happens to the US economy is important to us mainly for two reasons – the Guyana dollar is largely measured in relation to the United States dollar and second, the Guyana economy benefits heavily from remittances from Guyanese in the United States. In 2007 the Guyana economy grew faster than that of the US and our international reserves did not deteriorate, yet counter-intuitively the rate of exchange of the Guyana dollar to the US fell, albeit slightly. To make matters worse, because the US dollar was falling against the other major international currencies, those declines were reflected in the rate of the Guyana dollar against those currencies, resulting in increased prices for imports from those countries.
Another major imported product – fuel – is priced in United States dollars and a significant part of the increase in the price of a barrel of oil is attributable to the fall in the rate of the US$. In passing, it should be noted that Guysuco and other exporters to non-US currency destinations would have benefited from the fall in the rate of the US$ and by extension of the Guyana dollar.
Remittances
The second major reason for the relevance of the outlook of the US economy to Guyana was shown in an article in this newspaper earlier this week referring to a report by the Multilateral Investment Fund (MIF) of the Inter-American Development Bank (IDB) that Guyana leads the Latin America and Caribbean region in remittance receipts in 2007 as a percentage of GDP, with US$424M or 43 per cent of GDP received. These are truly staggering numbers and warrant a response by way of an analysis from the Bank of Guyana and our academics.
The obvious question is whether such levels can be maintained. If the US economy continues to under-perform causing a loss of jobs and a fall in income, it would be difficult for Guyanese in the US to maintain the level of remittances they have been sending back home. It is true that increasing numbers of Guyanese are taking their chances in the Caribbean – with Antigua, Barbados and Trinidad and Tobago being the more prominent countries – and that so far the economies of these countries have been steady. This should mean that remittances from those countries should not be affected and may even increase as more Guyanese head in their direction. The real fear therefore lies with respect to the US economy.
Recession or not? – OECD
The Organisation for Economic Co-operation and Development (OECD), a grouping of 30 mostly developed democratic countries, including the three powers of North America, most of Europe and Asian Pacific members Australia, Japan, South Korea and New Zealand, in an assessment released in Paris last week was only prepared to say that the US economy is “teetering on the brink of recession” – defined as two consecutive periods of negative growth. The US economy is expected to grow 0.1 per cent in the first quarter, a sharp reduction from the 0.3 per cent estimated in December, and to show zero growth in the second, a sudden halt compared with the 0.4 per cent projection given previously. Despite the sharp downward revision, acting chief OECD economist Jorgen Elmeskov is of the opinion that “it may be premature to declare a recession” in the United States.
For the year as a whole, 2008 is projected by the OECD to grow 1.4 per cent, down from the December estimate of 2.0 per cent, Given the recent swings in the economy it would be surprising if this estimate is not subject to a number of revisions as the quarters progress.
IMF
The assessment is likely to be confirmed by the IMF in its twice-yearly World Economic Outlook, a leaked draft of which shows that it also believes that the US economy “remains very weak, certainly close to a possible recession.” Despite the dollar’s recent steep losses, the draft also suggested that the IMF saw its present value as still “rather strong.”
US businesses
The Conference Board, a major and influential US business group in a report released within the past 48 hours has reported that its index of future economic activity dropped for the fifth consecutive month in February, suggesting that the weakening American economy could, indeed, be slipping into recession. The index is designed to forecast where the nation’s economy is headed in the next three to six months.
Businesses and think tanks attribute the situation to rising gas prices, falling home prices and tightening credit markets which have begun squeezing consumers and businesses, forcing them to cut spending.
Billionaire US investor Warren Buffett dismissed the theoretical definition of recession saying that it is not a question of whether the American economy was in a recession but how far it will go. The legendary billionaire investor expressed concern about the declining wealth, purchasing power, employment and income and does not rule out the possibility that the country’s economic woes could worsen.
More positively, however, Buffett does not consider current conditions as bad as the downturn of 1973 and 1974 when Americans were also battered by skyrocketing oil prices, and he expressed optimism that the economy would rebound strongly in time. Buffett also repeated his belief that the US dollar will continue weakening for as long as the United States maintains a hefty current account deficit, particularly with China and the countries of the Middle East from which it imports oil.
Conclusion
These fears are not without merit. The dramatic meltdown and bail-out of Bear Stearns, one of the US’s largest underwriters of mortgage bonds resulting from the collapse in June of two of their internal hedge funds that had been heavily invested in mortgage securities, emphasises the continuing crisis in the housing sector which is affecting not only the pockets but the psyche of American consumers, who could always count on having some equity in their homes (the value less any debts owed on the house). Even the proverbial dream is evaporating to such an extent that illegal migrants are now voluntarily going back to their homes, something which would have been considered unthinkable one year ago.
The collapse in the US housing market coincides with rising food, energy and raw material costs, raising the spectre of inflation for consumers, but making it more difficult for central banks facing a choice between cutting interest rates to spur growth and keeping them high to curb prices.
As the US braces for troubled waters, those remittances may indeed be in doubt.