Economic Review - September 2008

Constrained by soaring international commodity prices and weak economic performances of its major trading partners, expansion of the Barbadian economy slowed to an estimated 1.3% during the first six months of 2008, well below the average first-half growth rate of 3.6% experienced during the preceding five years. For the fourth consecutive first half, growth was driven mainly by the non-traded sectors, led by continued — albeit reduced — gains in wholesale and retail trade, business services as well as transport storage and communications. Similarly, growth in traded sector activity slowed considerably, primarily on account of a weaker performance in the tourism industry. Higher costs for imported food and fuel put substantial pressure on the external current account, which filtered through to domestic prices, pushing inflation upward. Nonetheless, foreign reserve outflows associated with these higher import costs were offset by sizable first-quarter capital inflows, improved travel credits and a modest pick-up in revenue from domestic exports, leading to notable growth in the net international reserves (NIR). The banking system continued to be characterised by excess liquidity as higher deposit growth overshadowed a build-up in credit to the non-financial private sector. This rising liquidity allowed government to finance its rising deficit mainly from domestic sources.