Looking back to Q1 2007: How did we end up here?

It’s 2010 here in Bermuda.  We’re facing an ongoing recession likely to last into the foreseeable future, a run away budget, job losses, glut in real estate, a downturn in construction and rising youth violence.  It could be said that we’ve had better years.  Recent opinion polls have suggested many things, among them low confidence in Bermuda’s economy.  By comparison 66 percent of people polled by the local daily The Royal Gazette thought in 2007 Bermuda’s economy was in good shape while today only 18 percent would agree.  How did we get here and should we have seen it coming?

Leading businessman Peter Everson responded to the recent poll results suggesting a poor outlook for the island’s core sectors of financial services, construction, and tourism/hospitality. 

"It is the financial services sector that brought the crisis upon the developed economies because it grew too large; it is now in a downturn and it is likely to be some time before it bottoms out let alone promotes net new hiring,"

Addressing prospects for the construction industry Mr. Everson suggested unnecessary glut was due to cause difficulties as office space goes unrented and hotels have only modest occupancy. 

"It is unlikely that there will be significant new building activity until some part of this slack has been taken up,"

Looking back to 2007 our economy was booming.  Finance Minister Paula Cox had noted that for more than five budgets in a row Government was bringing in more revenue than projected.  Chamber of Commerce vice president Philip Barnett commented on the wealth of opportunity created by international business.  They were good times.  So how did we come to this point today?

In 2007 while enthusiasm was high there were those in the community voicing concern that perhaps things were a little too good.  UBP Senator Bob Richard’s deserves some credit for having pointed out that we may be showing signs of overheating and having suggested steps to help slow our ascent.  Though who could have known that things would take a rather abrupt turn?  How could it have been conceived that a housing bubble in the United States would pop and in turn our own bubble would too?  Perhaps the signs weren’t crystal clear but was the writing on the wall and did we do ourselves any favors by not paying them greater heed?

We first caught wind of potential troubles in the US housing markets in February 2007 as we questioned the impact of the recent rapid interest rate hikes on homeowners, especially those who were on variable rate mortgages.  Had these individuals overstretched their budgets such that they would be unable to pay?  If it were to create a trend that continued, we mused, could it cause housing values to continue their descent and bring forth an overall devaluation of the housing markets, thus putting more and more people underwater? 

It was near this time that Government was frolicking in its wealth as it threw money at various ventures all while being rather limited when it came to providing details of how it was being spent.  While some expressed their concerns about graduation rates having greater importance it was determined that youth would best develop via greater investment in sport and thus some $15 million was pledged to take Bermudian football to the next level.  This on top of the $14 million that was already allocated to and spent on youth sport the previous year.  The impact of that funding some three years later is less than clear as youth have become more troubled and education has worsened.

Concerns were raised that growth was reaching such a pace that home ownership was even being pushed out of reach.  This while housing demand had outstretched supply to such a state that average Bermudians were being sidelined in terms of options to even just live let alone own.  Housing was high in demand as the BHC waiting list continued to grow to nearly 600 strong.  People went to such extents to seek nearly any alternative to Bermuda’s skyrocketing cost of living that they’d taken to living in derelict buildings.

The strains of growth were breeding growing resentment towards our guest workers despite the heavy reliance we have on them to keep money flowing in our local economy.  We examined how a large part of our problems with regards to growth was the lack of infrastructure geared towards handling the influx of additional guest workers.  Inadequate housing for expats was the focus of considerable analysis as to the causes for our supply/demand issues.  This all while tourism was being spun as a rejuvenating force and once again a towering economic pillar.  External independent analysts however countered this as they pointed to trends of “secular decline”.  Is it any wonder that many questions were raised about whether tourism would actually sustain its pace?  Was it indeed a fit place for us to have dedicated so much focus and so many resources at the time?

It would seem that despite public perceptions being high in 2007, under the surface many problems were brewing.  There were signs that perhaps money had become a bit too easy both home and abroad as some questioned the risks of an economy overheated and the possibility of what could happen if the bubble bursts.  Bermudians were quickly being outpaced by growth as we lacked the ability to satisfy the demands that accompanied it.  Unsurprisingly resentment grew while certainly not helped by those willing to throw fuel on the fire.  While things were certainly good it was not entirely clear that they’d remain that way forever.  Indeed, in good times it can be easy to get caught up in the party and forget all about the mess that’s left to be cleaned up when the party ends.

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