Publication date: 5 April 2009 | Covering: January – March 2009
Quarterly Briefing
- Obama inaugurated: January 20; first African-American president; inherits worst economic crisis in decades; immediate focus on stimulus
- ARRA stimulus: February 17 American Recovery and Reinvestment Act signed; US$787bn; tax cuts, infrastructure, state aid; largest peacetime fiscal package ever
- Stock market bottom: S&P 500 hits 666 on March 9 — lowest since 1996; Dow below 6,600; panic selling peaks; recovery begins from this point
- Fed expands QE1: March 18 FOMC announces US$1.15 trillion additional asset purchases; Treasury bonds and MBS; “going nuclear” on deflation risk
- Madoff guilty: March 12 Bernard Madoff pleads guilty to US$65bn Ponzi scheme; largest fraud in US history; regulatory failure exposed
- G20 London summit: April 2 (FRESH 3 days); US$1.1 trillion global stimulus commitment; IMF resources doubled; coordinated response agreed
- UK bank nationalisations: RBS, Lloyds part-nationalised; UK deficit to 12% of GDP; sterling falls sharply
- Jamaica: External environment worsening; tourism revenue falling; remittances declining; fiscal position deteriorating
Obama Takes Office; Massive Stimulus Deployed
Barack Obama was inaugurated as the forty-fourth President of the United States on 20 January 2009, inheriting an economy in freefall. The financial crisis that had exploded in September 2008 with the collapse of Lehman Brothers was still unfolding, with GDP contracting at an annualised rate of 6.8% in the fourth quarter of 2008, job losses running at over 700,000 per month, and financial markets deeply impaired. The new administration moved with unusual speed: on 17 February, just four weeks after inauguration, President Obama signed the American Recovery and Reinvestment Act, providing US$787 billion in fiscal stimulus through a combination of tax cuts, infrastructure investment, aid to state and local governments, and expanded safety-net spending. The ARRA was the largest peacetime fiscal expansion in US history. The Federal Reserve, meanwhile, expanded its extraordinary monetary policy: on 18 March the FOMC announced an additional US$1.15 trillion of asset purchases, including US$750 billion of mortgage-backed securities and US$300 billion of longer-term Treasury bonds, dramatically scaling up QE1 in an attempt to drive down long-term interest rates and reflate the economy.
Market Bottom; G20 Coordination
The S&P 500 stock index reached its crisis trough on 9 March at 666 — a level not seen since 1996 — representing a 57% decline from the October 2007 peak. The Dow Jones Industrial Average fell below 6,600. The extraordinary monetary and fiscal policy response, combined with the beginning of stabilisation in housing markets and the removal of the most extreme tail risks, enabled a recovery from that low that would prove dramatic in pace. By early April the market had already bounced significantly from the bottom. At the G20 summit in London on 2 April, world leaders committed to US$1.1 trillion in additional global stimulus, agreed to double IMF resources to US$500 billion, and coordinated the framework for financial regulatory reform. The coordinated international response was significantly more effective than the fragmented national responses to the 1930s Depression, and helped stabilise confidence that the global economic and financial system would hold together.
Jamaica: External Shock; Mortgage Conditions
The global financial crisis hit Jamaica through multiple channels simultaneously. Tourism — the island’s largest earner of foreign exchange — declined sharply as recessions in North America and Europe reduced discretionary travel spending. Remittances, the second-largest source of foreign exchange, also fell as Jamaican diaspora workers lost jobs or saw incomes compressed in the United States, United Kingdom, and Canada. Commodity prices for Jamaica’s bauxite and alumina exports had collapsed, reducing export earnings and government royalties. The cumulative impact was a significant deterioration in Jamaica’s external position and fiscal accounts. Domestic credit conditions remained tight, with the Bank of Jamaica managing monetary policy to defend the currency and contain inflation, keeping interest rates elevated. The NHT’s subsidised mortgage rates — 0%, 2%, and 4% on loans to J$6.5 million individually or J$13 million jointly — remained the most accessible form of housing finance, but the broader economic deterioration constrained household incomes and affordability.
Looking Ahead to Q2 2009
The market has bottomed — or so it appears from this vantage point — and the fiscal and monetary stimulus is enormous. The question is whether it is sufficient to arrest the collapse in household and business confidence, and whether the banking system can be stabilised. The US Treasury stress tests, results expected in May, will be the critical next marker. For Jamaica, the external shock is expected to persist through 2009, with the economy contracting and the IMF programme question becoming more pressing.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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