An­tho­ny Wil­son

For the 12 months lead­ing up to De­cem­ber 2008, the prices of goods and ser­vices in the lo­cal econ­o­my, re­ferred to as head­line in­fla­tion, in­creased by 14.5 per cent, ac­cord­ing to the Cen­tral Bank. The same in­sti­tu­tion re­ports that in the 12 months lead­ing up to De­cem­ber 2009, head­line in­fla­tion on­ly in­creased by 1.3 per cent and that food price in­fla­tion, which had in­creased by 30.6 per cent in 2008, ac­tu­al­ly de­clined by 0.2 per cent in De­cem­ber 2009. Price de­clines were ob­served by the Cen­tral Sta­tis­ti­cal Of­fice, which col­lects the da­ta, in the fol­low­ing prices:

�2 Bread and ce­re­als (down by 7.7 per cent)

�2 Milk, cheese and eggs (down by 10.2 per cent

�2 Oil and fats (down by 0.7 per cent)

�2 Veg­eta­bles (down by 1.3 per cent)

�2 Meat (down by 1 per cent)

While the rate of in­fla­tion is at its low­est lev­el in near­ly two decades, oth­er prices have fall­en in the econ­o­my as well. Ac­cord­ing to the Cen­tral Bank's Sum­ma­ry Eco­nom­ic In­di­ca­tors (SEI) bul­letin, res­i­den­tial me­di­an house prices fell to $975,000 in Sep­tem­ber 2009, a de­cline of 9.3 per cent over the same pe­ri­od in 2008. The de­cline in the val­ue of res­i­den­tial prop­er­ties along with a dry­ing up of new for­eign in­vest­ment in the en­er­gy sec­tor and the push by the HDC to dis­trib­ute more State-sub­sidised house is like­ly to mean that house rents in the wider econ­o­my have sta­bilised or are in a de­cline mode. Not on­ly has there been a de­cline in me­di­an house prices, but the prices of grav­el, plas­ter­ing sand, ce­ment and steel bars are al­so re­port­ed in the SEI to have de­clined as well. In 2009, the com­pos­ite in­dex of the Trinidad and To­ba­go Stock Ex­change de­clined by 9.2 per cent in 2009, end­ing the year at 765.3. This means the com­pos­ite in­dex has de­clined by 29 per cent from its peak in 2004 and that the lo­cal stock mar­ket has de­clined every year for the last five years ex­cept for 2007 when the in­crease was less than two per cent.

The ev­i­dence seems to in­di­cate that T&T has suf­fered a sharp re­duc­tion in as­set prices with the me­di­an price of hous­es de­clin­ing by over 50 per cent from the re­al es­tate peak in 2007 and with share prices de­clin­ing by 22 per cent from the end of 2007. The de­cline in lo­cal re­al es­tate and stock mar­ket val­ues were the very is­sues that pre­cip­i­tat­ed the col­lapse of Japan's bub­ble econ­o­my in the mid-1990s. What fol­lowed for Japan was the lost decade as Japan­ese post­poned their pur­chas­es (curbed their pri­vate de­mand) based on the as­sump­tion that the re­frig­er­a­tor or 56-inch flat-screen tele­vi­sion they want­ed to buy to­day would be cheap­er next month. The Japan­ese econ­o­my still has not caught it­self.

So the ques­tion is this: Is T&T at the start of a pe­ri­od of de­fla­tion or is what has been ob­served sim­ply an is­sue of dis­in­fla­tion? Is the T&T econ­o­my fac­ing a "tem­po­rary de­crease in the price lev­el in the econ­o­my," which is a com­mon de­f­i­n­i­tion of dis­in­fla­tion or are we fac­ing a "sus­tained de­crease in the gen­er­al price lev­el in an econ­o­my" which is how de­fla­tion is de­fined.

The Cen­tral Bank is on record as pre­dict­ing that T&T will re­sume pos­i­tive growth this year, stat­ing "the econ­o­my could ex­pand by around 2 per cent in 2010." Cen­tral Bank Gov­er­nor Ewart Williams has gone fur­ther with a pre­dic­tion that eco­nom­ic growth will re­sume in the sec­ond quar­ter (from April to June). In a pre­sen­ta­tion on the econ­o­my last month, Williams said that this pre­dic­tion is "sub­ject to size­able down­side risks" as it is de­pen­dent on the re­cov­ery in the glob­al econ­o­my spurring de­mand for T&T's en­er­gy prod­ucts and on the Gov­ern­ment spend­ing mon­ey on an­nounced in­fra­struc­tur­al and hous­ing pro­grammes. But more than any­thing, ac­cord­ing to Williams, the sec­ond-quar­ter re­cov­ery in the econ­o­my de­pends on re­cov­ery in pri­vate de­mand from the sec­ond quar­ter. What the Gov­er­nor means is that cit­i­zens of this coun­try would need to bor­row mon­ey or draw down on ac­cu­mu­lat­ed sav­ings in or­der to make pur­chas­es (in the case of in­di­vid­u­als) or in­vest­ments (in the case of com­pa­nies) for the econ­o­my to re­sume its growth path.

As the Gov­er­nor not­ed, many of the pre­con­di­tions for the sec­ond-quar­ter re­bound are in place:

�2 The sharp de­cline in in­fla­tion, to­geth­er with the slack in the labour mar­ket, should re­sult in an eas­ing of wage pres­sures, which should help busi­ness re­cov­ery;

�2 Oil and gas prices have sta­bilised at high­er prices than we ex­pect­ed a year ago, which should help to strength­en fis­cal per­for­mance and for­eign ex­change earn­ings;

�2 Banks' lend­ing rates have de­clined and this could spur pri­vate con­struc­tion and oth­er projects that have been on hold for some time.�

But even with the pre­con­di­tions for bor­row­ing/draw­ing down sav­ings or mak­ing busi­ness de­ci­sions to in­vest in new plant and equip­ment in place, there is no guar­an­tee that re­newed bor­row­ing or in­vest­ment will take place. There is one ab­solute­ly nec­es­sary pre­con­di­tion for the re­sump­tion of growth that the Gov­er­nor did not men­tion and which may not re­spond to moral sua­sion: in­vestor con­fi­dence and the psy­chol­o­gy of prof­it.

Giv­en the fact that the rate of in­fla­tion has fall­en much faster than the rate of gov­ern­ment spend­ing, every­one now con­cedes that the rate and trend of prices in­creas­es or de­creas­es in this econ­o­my is more due to pri­vate sec­tor de­mand. (The idea–first out­lined by Mil­ton Fried­man, that "in­fla­tion is al­ways and every­where a mon­e­tary phe­nom­e­non" which means that in­fla­tion will fol­low if the growth in the mon­ey sup­ply per­sis­tent­ly ex­ceeds the growth in the econ­o­my–does not seem to ap­ply to the T&T econ­o­my at this point.) The idea that con­sumers and in­vestors are go­ing to be­have dif­fer­ent­ly in 2010 than they be­haved in 2009, in the ab­sence of some stim­u­lus in in­vestor con­fi­dence and the prof­it psy­chol­o­gy seems a lit­tle far-fetched. The ques­tion is why aren't we al­ready see­ing the econ­o­my show­ing more signs of life if the Cen­tral Bank has at­tempt­ed to dri­ve down the lend­ing rates of com­mer­cial banks by re­duc­ing the re­po rate on nine oc­ca­sions last year from 8.75 per cent in De­cem­ber 2008 to five per cent in De­cem­ber, 2009.

This could be as a re­sult of a dis­con­nect be­tween the Cen­tral Bank's mon­e­tary poli­cies and the ac­tions of com­mer­cial banks.

While the Gov­er­nor states that the lend­ing rates of banks have de­clined, the Cen­tral Bank's Eco­nom­ic Bul­letin states that while the me­di­an prime lend­ing rates of lo­cal com­mer­cial banks fell to 9.75 per cent in Jan­u­ary, the de­cline in over­all rates on loans was "much more mea­sured." In oth­er words, while the best cus­tomers of banks are get­ting the prime lend­ing rate, the cost of bor­row­ing for every­one else has not de­clined near­ly as much. Un­less the Gov­ern­ment and the pri­vate sec­tor do some­thing to re­ju­ve­nate in­vestor con­fi­dence and the prof­it psy­chol­o­gy in the pop­u­la­tion, this coun­try could be fac­ing a Japan­ese-style de­fla­tion­ary spi­ral.

If you are the sec­ond largest econ­o­my in the world, you have much more lee­way to ne­go­ti­ate your way out of a de­fla­tion­ary spi­ral than if you are a small, open, en­er­gy-based econ­o­my.