Impact of a second global recession on Pacific Island Countries

When reading the Forum Secretariat’s excellent E-Newsletter entitled “Trends and Developments” I came across a summary of implications of the current global conditions for the Pacific Region, published in the “In Brief: Economic Update Series”.

The link to the summary is here, in Issue 3 of the In Brief: Economic Update Series. However I have briefly summarized below the implications for Pacific Island Countries from a second global recession, an event that is threatened in 2012 by the uncertainty around the future of the Eurozone and other factors.

The first three implications are obvious even to non-economists but not everybody will be aware of the last three. All of the below are relevant directly or indirectly for agricultural and forestry commodity trade, to food security and to the income and expenditure of farming communities across PICs.

  • Lower remittances: A slowdown in income in richer immigrant destinations is likely to lead to a drop in remittance flows into PICs.
  • Lower tourism: Tourism hinges on the income available to spare on leisure in tourist source countries and this in turn depends on the economic fortunes of those countries. 
  • Lower export demand: Affecting PICs with a larger proportion of export revenue to total national income, a global slowdown will hit export demand. However according to the regional in 2012 Australia and New Zealand have a positive outlook that will cushion the blow from decreased demand from other large markets. 
  • Exchange rate appreciations: There are winners and losers from this. Appreciation of Australian and New Zealand currencies relative to PIC currencies means that imported goods from those countries will be more expensive to PICs, hitting any consumer or business that purchases goods from those countries. However island exports will be cheaper from the perspective of Australia and New Zealand, benefitting PIC exporters. Along with lower global export demand overall, the net effect for individual business is unpredictable.
  • Commodity prices: The price of gold tends to increase in hard economic times and is currently on the increase. This is good for PNG, Solomon Islands and Fiji who export gold. The PIFS report cites an International Energy Agency report claim that the price of oil may continue to drop in 2011 but a 2012 market prediction from the same agency states that the price may increase. This is as much an economic driver as a result of economic conditions. However it is clear that as oil importers, PICs would benefit from lower oil prices and suffer from higher oil prices. It is the latter that appear more likely in 2012 especially given the prospect of an oil embargo by the international community on significant crude exporter, Iran. 
  • Trust Funds: Several PICs have large amounts of money stored as public savings abroad; in the 2008 crisis when stock markets fell, some of these funds lost 20-30% of their value. A second recession threatens similar consequences, but these consequences will also differ by country according to investment portfolio.

Applying some perspective on relative significance of these factors, the ADB’s latest edition of the Pacific Economic Monitor states that:

“the Eurozone crisis is expected to have only limited impacts on the Pacific because the region‘s growth prospects are more closely tied to the economies of Australia and New Zealand, which remain relatively buoyant due to strong demand from Asian markets for their commodity exports. Main impacts will be indirect, through trade and investment linkages between the EU and the Pacific‘s economic partners, declining values of Pacific trust funds, and declines in tourism, particularly from US and Japan, if these economies weaken.”

In the same document,

“an analysis of sovereign investment funds in the Pacific shows that the current period of volatility to date has resulted in small valuation losses (relative to 2008-09), but, looking forward, considerable downside risks remain.”

Real GDP Growth and Inflation

Below are the estimated real GDP growth and inflation prospects for PICs in 2012, from the Asian Development Bank Pacific Economic Monitor.

 

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