According to the Central Bank’s latest Monetary Policy Report, the domestic economic outlook for 2021 will be linked to the pace of the global recovery.
Energy commodity prices are expected to improve in the short to medium term, driven by rising global demand.
“Additional impetus will come from supply-side factors such as production limits from OPEC and partner countries.
“Local energy production should receive support from rising commodity prices and increased demand for energy-related products as some economies gradually re-open,” the bank explained.
Moreover, it said, the extent of local COVID-19 containment measures alongside the planned acceleration of vaccinations will affect how fast domestic output recovers in the second half of this year.
According to the bank. headline inflation is expected to remain contained in the short to medium term.
The bank added that core inflation should remain low and stable given minimal upward pressure on aggregate demand owing to continued limits on economic activity and ample spare production capacity.
“Global supply chain challenges following the disruptive effect of the pandemic can provide some upward impetus to international food prices which may pass through to domestic food inflation. In addition, rising inflation in the US, if more intractable than initially envisaged, may influence domestic prices in the periods ahead,” the bank noted.
Further, it said the country’s external current account is expected to record a larger surplus in 2021 when compared to the previous year due to a pick-up in export earnings.
This performance is anticipated to stem from the significant rebound in energy prices compared to the previous year, leading to a shoring up in the value of energy exports, the bank added.
“Further complementing this outturn is the anticipated increase in non-energy exports due to an improvement in external demand from export destination markets, as these economies resume economic activity,” the bank said.
Financial sector conditions are expected to remain favourable for the rest of 2021.
Policy support will keep liquidity levels in the financial sector high enough to facilitate public and private sector activity.
And while the rates on short term Treasury instruments increased over the first half of 2021, generally high liquidity may limit this movement going forward to the end of 2021, the bank said.
It added that the short-term TT-US differential is thus expected to remain positive and stable for the remainder of 2021.
However, longer-term domestic rates are expected to respond to the pace of Central Government borrowing activity.
In its overview, the bank said the pandemic continues to weigh on the domestic economy.
Economic activity contracted sharply in the final quarter of 2020, it noted, adding that energy sector performance over the first four months of 2021 was mixed.
The bank also noted while the output of several products dipped, particularly natural gas and its related downstream products, prices of some key energy exports improved significantly over the period.
Improvements were recorded in a few non-energy sectors, including construction, finance and insurance, real estate and electricity and water going into 2021.
However, the bank said the resurgence in construction and manufacturing observed at the start of 2021 was cut short by the imposition of a period of stringent lockdown measures in the second quarter.
Preliminary data on economic activity for the first four months of 2021 suggest that a contraction in the non-energy sector is likely during the second quarter of 2021, given the renewed restrictions, the bank added.
I”n this environment of restrained economic activity, inflation remained contained. Headline inflation averaged 0.9 per cent over October 2020 to April 2021.
“On a year-on-year basis to April 2021, both core and headline inflation measured 1.1 per cent. Food inflation slowed over the period, decelerating from 4.4 per cent in October 2020 to 1.5 per cent in April 2021,” the bank said.
It also noted that T&T’s external accounts recorded an overall deficit of US$352.7 million in the fourth quarter of 2020.
“Over the period, the current account recorded a deficit—the second consecutive quarterly deficit for 2020—mainly reflecting a deterioration in export earnings,” the bank explained.
It said the financial account recorded a net outflow, primarily owing to transactions in the other investment and portfolio investment categories.
At the end of May 2021, gross official reserves stood at US$6,672.1 million, which represented 8.1 months of prospective imports of goods and services.
However, the bank said while fallout from the COVID-19 pandemic continues to affect credit conditions, the financial sector remained stable thus far in 2021.
Liquidity declined in the first half of 2021, partly owing to financing activity by the Central Government.
The bank also noted that although it has held net open market operations (OMO) activity at zero since November 2020, daily average excess liquidity levels, as measured by commercial bank nonremunerated deposits at the Central Bank in excess of the reserve requirements, continue to be elevated at just under $8 billion, but down from $11.5 billion at the start of the year.
The bank also added that treasury securities gradually increased by mid-2021, resulting in generally stable and positive TT-US short term differentials.
“However, growth in consolidated financial system credit to the private sector turned negative in early 2021 and has remained that way since, led by continued declines in business lending along with a recent falloff in consumer lending and a deceleration in real estate lending,” it said.
The bank also noted that ongoing vaccination programmes coupled with the gradual relaxation of restrictions on movement are expected to support a significant pickup in global growth in the second half of 2021 and into 2022.
However, it said, the IMF noted that the strength of the recovery would vary across countries depending on the impact of the pandemic on health care systems and economic activity, exposure to cross-border spillovers of the virus variants and the effectiveness of policy support to limit economic damage.
“In EMDEs and low-income countries, delayed access to vaccines could result in further lockdowns and restrictions, thus undermining growth prospects,” the bank said.
It added that in the Caribbean, commodity producers are expected to benefit from the uptick in energy prices, but subdued growth is anticipated for tourism-dependent economies given continued soft demand for travel and tourism-related services.