A recession is a general slowdown in economic activity in an economy, which is sometimes associated with the ebb and flow of the business cycle. As first reported in this space on Sunday, the Central Bank's provisional estimate of the data available to it is that the T&T economy contracted by close to 2 per cent in the first half of 2015, with the energy sector declining by 3.5 per cent and the non-energy sector declining by about 1 per cent.
While not breaking out the numbers in its monetary policy announcement, the Central Bank's evidence pointed to the fact that the decline in the non-energy sector between January and June 2015 was due to a slowdown in construction, distribution and manufacturing.
And, according to the Central Bank: "Early indicators point to continued sluggish economic performance in the third quarter of 2015 (July, August and September)."
If validated (and it is an important if) the Central Bank's announcement means that, technically, the T&T economy is in a recession as the nation has suffered two consecutive quarters of negative economic growth as measured by T&T's gross domestic product (GDP).
The Central Bank was careful to state that its provisional estimates had indicated that the economy contracted by close to 2 per cent in the first half of 2015 (and one assumes that the Bank was referring to calendar 2015–from January to June–and not fiscal 2015, which would be from October 2014 to March 2015).
The fact that the Central Bank used provisional estimates to conclude that the economy had contracted for two quarters presents the first issue with the statement: All provisional estimates are subject to revision as more and better information comes to hand. As such, there is a possibility that the revisions to the GDP data could result in a different interpretation than arrived at from the first-past interpretation.
Among the macro-economic indicators that point to a recession are declines in GDP (gross domestic product), investment spending, capacity utilization, household income, business profits and inflation, according to Wikipedia. Unemployment rates rise in a recession.
The second issue with determining whether T&T is in a recession is the absence of timely information on certain of the indicators of a recession. While the information on inflation is produced in a timely and consistent manner by the Central Bank, data on investment spending, household income and business profits are not.
Although significant improvements have been made, the data on unemployment are still at least two quarters later than would be expected in most countries operating in the 21st century.
But there are other indicators that the domestic economy may suffering some of the impacts of a recession.
The December 2014 Labour Confidence Survey Report, conducted by the Central Bank, indicates that the Labour Confidence Index fell by 7.3 points to 30.6 in the fourth quarter of 2014 with the institution stating: "While the fourth quarter usually shows a seasonal upswing in economic activity and employment, the negative overhang from the sharp decline in petroleum prices contributed significantly to this decline in the index."
Also on the issue of unemployment is the fact that in the July 2015 Economic Bulletin, the Central Bank indicated that the latest data from the Central Statistical Office showed an increase in the unemployment rate during the first quarter of 2015 to 3.7 per cent from 3.1 per cent recorded in the corresponding quarter of 2014. That increase in the unemployment rate was indicative of a withdrawal of persons from the labour force, which moved from 643,500 persons in Q1 2014 to 623,100 persons in Q1 2015.
Data, according to the July Economic Bulletin, also revealed an increase in the number of retrenchment notices filed with the Ministry of Labour and a decline in the job vacancy rate.
While some may choose to diagnose a recession based on provional estimates of GDP, the point needs to be made that the latest unemployment statistics do not point unequivocally to a recession and the absence of some other data makes such a determination quite difficult.
And it is absolutely essential that the Government is absolutely sure that T&T is in a recession before Mr Imbert presents the budget on Monday.
As noted above, among the indicators of a recession are that unemployment rises and business profits and investment spending decline.
In a T&T context, all three of these often lead to a reduction in the tax revenue collected by the Government because employees who are laid off do not pay taxes, companies that declare a reduction in profits pay less taxes and the State collects less revenue if there is a decline in investment spending.
Further, if households are affected by an increase in unemployment (if a family member gets retrenched, for example) the first response of the household is likely to be a reduction in their consumption of goods and services.
And if a business is affected by a decline in profits, it is likely to reduce corporate spending, by cutting back on employees on contract, reducing the expenditure on new plant and equipment and even delaying expenditure of "non-essential" goods and services.
One of the consequences of a recession is that the amount of revenue that the Government receives from the non-energy sector would decline–perhaps precipitously
This will have a negative impact on production by manufacturers who depend on the local market, as households and businesses take decisions to delay new construction, put off the purchase of big-ticket items and look for ways to reduce day-to-day expenditure.
If the decline in non-energy revenue is coupled with declining revenue from the energy sector–both because of reduced prices for petrochemical exports on the global markets and as a result of a decline in production of those exports because of the gas curtailment issues–the country's 2016 revenue picture starts to look very dire indeed.
On the other hand, as recessions often lead to a reduction in aggregate demand–by households directly affected by rising unemployment and businesses by reduced spending –there may be a decline in the demand for foreign exchange as both households and businesses become more judicious in their spending.
So the question is: If the economy is in decline, can the 2016 budget afford to be as fiscally prudent as might have been the case if the economy were flat or showing negligible growth.
In other words, if the argument is made that Government expenditure–both capital spending and recurrent–is the main driver of growth in T&T economy, would the new party in power cut expenditure and raise taxes, to close the fiscal deficit, if that would contribute further to the slowdown in the economy?
Does that approach make any sense, whatsoever?
While this may "solve" the foreign exchange problem, it runs the risk of returning the country to the very dark days of 1987 and 1988.
Would it not be much better to find ways of closing the fiscal deficit without making drastic cutbacks in expenditure and penurious increases in taxes?
The issue of business confidence and the impact of the recession psychology is also crucial. Consider a local manufacturer, producing biscuits or ketchup, whose output is sold on the local and regional markets and who operates in a non-unionised environment.
Understand that the manufacturer has had problems getting US dollars on a consistent basis to pay for flour or sugar or tomato paste for the last 18 months, and is now faced with a significant increase in his overdraft costs (as a result of higher interest rates) and the prospect that demand for his products in the local market may soften in the near future.
Would that manufacturer be looking to expand his production and hire new workers or would he be looking to cut costs, delay new equipment purchases and reduce the number of his "non-essential" staff?
As Finance Minister Colm Imbert prepares to put the final touches on Monday's budget, might I suggest that the nation really would benefit if it heard from T&T's captains of industry, men like Aleem Mohammed, Arthur Lok Jack, Robert Bermudez and Christian Mouttet, on this point.
And on whether their companies, which employ thousands of nationals, would be better off if there was more certainty in the supply of US dollars but they had to pay more for it.
They may also wish to opine on whether the Central Bank's strategy of hiking the cost of borrowing in order to mitigate capital flight has any chance of success or if that strategy is, in fact, contributing to capital flight.