Green Shoots Abroad, Deep Roots Recession at Home: Jamaica’s Economy in Q2 2009

Jamaica Economic Intelligence | Q2 2009 | April–June 2009

Key Findings

• The U.S. economy shows tentative signs of stabilisation as global stock markets rally sharply from their March 2009 lows
• Jamaica’s GDP contracts for a fifth consecutive quarter, with bauxite production suspended and tourism still declining
• H1N1 swine flu declared a pandemic in June, adding fresh booking anxiety to a tourism sector already under stress
• The IMF programme passes its first quarterly review, maintaining Jamaica’s access to balance-of-payments financing
• Inflation falls toward single digits as low energy prices and subdued food costs ease household budget pressure
• The Bank of Jamaica continues its easing cycle, cutting its benchmark rate toward levels not seen since the pre-crisis period

The word “green shoots” entered the global economic lexicon in Q2 2009, coined by Federal Reserve Chairman Ben Bernanke to describe tentative signs of recovery in the U.S. economy. For Jamaica, the shoots are not yet visible, but the conditions that will allow them to emerge — lower inflation, falling interest rates, an IMF framework in place and a U.S. economy slowly stabilising — are beginning to take shape. The recession continues, but its most acute phase may be behind us.

The Global Context: Searching for a Bottom

The quarter opened against the backdrop of the deepest global contraction since the 1930s and closed with the first credible evidence that the free-fall had ended. U.S. equity markets, which had fallen nearly 60 per cent from their October 2007 peak to their March 9, 2009 trough, rallied by approximately 40 per cent through the end of June as investors concluded that systemic financial collapse had been averted and that the massive fiscal and monetary stimulus being deployed globally would eventually generate a recovery. The S&P 500 index’s Q2 2009 performance was its best in over a decade.

Federal Reserve Chairman Ben Bernanke’s March 2009 reference to economic “green shoots” captured a cautious but real shift in the data. U.S. housing starts, while still deeply depressed, showed less severe month-on-month declines. The pace of job losses, which had averaged over 700,000 per month in the first quarter, slowed to approximately 450,000 per month by June — still severe, but decelerating. The IMF‘s April 2009 World Economic Outlook projected global GDP contracting by 1.3 per cent in 2009 before recovering to positive growth in 2010.

Commodity prices reflected the tentative recovery in sentiment. West Texas Intermediate crude oil, which had fallen to a low of approximately US$32 per barrel in December 2008, recovered to approximately US$70 by the end of June 2009. For Jamaica, this recovery is a mixed signal: lower oil costs had been providing relief on the import bill and domestic inflation, and higher oil will eventually reverse some of that relief. But the oil price recovery also signals that global economic demand is returning, which is ultimately positive for a small open economy whose prosperity depends on the health of its trading partners.

Jamaica’s Economy: Still in the Trough

Despite the improvement in the global outlook, Jamaica’s economy has not yet found its bottom. The Planning Institute of Jamaica’s preliminary Q2 data indicate a year-on-year GDP contraction of approximately 3 to 4 per cent, broadly similar in severity to the Q1 decline and representing the fifth consecutive quarter of contraction. The recession is now deeper, in cumulative terms, than the 2001 episode that followed the September 11 attacks, though it has not yet reached the catastrophic depths of the FINSAC contraction of 1996–1998.

The sectoral picture is uneven but predominantly negative. Tourism — which accounts for approximately 20 per cent of GDP when the full supply chain is included — is continuing to contract. The bauxite and alumina sector, which contributes approximately 5 per cent of GDP and a larger share of export earnings, has been effectively shut down in several operations. The financial sector, while not facing the systemic stress of the FINSAC period, is dealing with rising non-performing loans and reduced business volumes. Agriculture has shown modest resilience, benefiting from lower input costs and the recovery in banana production since Hurricane Dean’s 2007 devastation, but not enough to offset the declines elsewhere.

Bauxite: The Sector That Fell Silent

Jamaica’s bauxite and alumina sector — which for decades was the island’s most important source of foreign exchange earnings, supporting entire parishes and their communities — is experiencing its most severe contraction since the 1980s oil shocks. The global collapse in aluminium prices, driven by the dramatic fall in Chinese and global industrial production during the 2008–2009 recession, has made Jamaican alumina production uneconomic for most operators. Alpart, formerly one of the largest alumina refineries in the Caribbean, suspended operations in early 2009. Jamalco’s operations have been reduced to minimum levels.

The human cost is concentrated in specific communities in Manchester, St. Elizabeth and St. Ann parishes that have few alternative employment options. The government has been working with operators to maintain some activities and provide transitional support to displaced workers, but the structural challenge is fundamental: alumina refining is energy-intensive and Jamaica’s energy costs, even after oil’s fall from its 2008 peak, make the island’s refineries marginal against competitors in Brazil, Guinea and Australia that benefit from cheaper gas-fired power. The long-term future of Jamaican alumina production will depend on either a sustained increase in aluminium prices or a structural reduction in Jamaican energy costs — neither of which is likely in the near term.

Tourism and the H1N1 Shadow

Jamaica’s tourism sector was already navigating a difficult second consecutive year of declining arrivals when a new threat emerged in late April: the H1N1 influenza virus, which originated in Mexico and spread rapidly across North America, Europe and beyond. On June 11, the World Health Organization declared H1N1 a pandemic — the first influenza pandemic in 41 years — raising concerns about travel safety and prompting some travellers to cancel or defer planned trips.

Jamaica reported its first confirmed H1N1 cases in May and implemented enhanced screening at its international airports. The public health response has been proportionate and effective, with no significant community transmission reported during the quarter. However, the WHO’s pandemic declaration had a broader effect on Caribbean travel bookings that was disproportionate to the actual risk: several North American families and organised tour groups cancelled plans in response to general travel advisories, adding to the already-weakened demand environment. The Jamaica Tourist Board and the Ministry of Health worked together to communicate Jamaica’s situation accurately to international media, but in an environment of heightened health anxiety, nuanced messaging has limited reach.

Preliminary data from the Jamaica Tourist Board indicate Q2 2009 stopover arrivals approximately 7 to 9 per cent below Q2 2008, continuing the year-on-year declines of the previous three quarters. Hotel occupancy along the north coast averaged approximately 60 per cent in Q2 — below the 65 per cent of Q2 2008 and well below the 72 per cent of 2007. Revenue per available room has been further compressed by discounting, meaning that even the occupancy that has been maintained has generated less income per room than historical norms.

The IMF Review: First Compliance Test Passed

One of the most significant positive developments of the quarter was the successful completion of the first quarterly review under Jamaica’s IMF Stand-By Arrangement. The Fund’s assessment concluded that Jamaica had met all quantitative performance criteria for the period through March 2009: the primary fiscal balance was on target, net international reserves exceeded the floor, and the government had complied with the structural benchmark commitments on tax administration.

The programme’s credibility has been enhanced by the government’s April budget, which laid out the fiscal path for the 2009–10 fiscal year in detail consistent with IMF commitments. The budget’s key features — a freeze on new public-sector posts, restraint in discretionary spending, targeted social protection for the most vulnerable, and no general public-sector wage increase — represent a genuine departure from the fiscal patterns of previous crisis periods, when programme commitments were often negotiated but not sustained under political pressure.

Inflation and the Easing Cycle

The Statistical Institute of Jamaica’s June 2009 data show consumer price inflation at approximately 9 to 10 per cent year-on-year — the lowest reading since 2006 and a dramatic reversal from the 25-plus per cent peak of mid-2008. The fall reflects lower energy costs (oil averaging approximately US$55–65 in Q2 2009 versus over US$100 in the equivalent period of 2008), lower food prices and weak domestic demand that is limiting the pricing power of domestic producers and retailers.

The Bank of Jamaica, responding to the improved inflation picture, has continued to reduce its benchmark overnight rate during the quarter, with the rate now in the low double-digit range following the series of cuts begun in Q1. Commercial banks have been slower to reduce retail lending rates, as their own funding costs adjust with a lag and as rising non-performing loan provisions constrain their risk appetite. However, the direction is clear: the easing cycle, if sustained, will eventually translate into meaningfully lower mortgage rates, improving affordability and providing support for property market activity. The BOJ has also communicated a commitment to maintain inflation within a target range in the medium term, providing a framework for the rate reductions to continue.

The Property Market: Tentative Signs

The residential property market remains subdued, but there are tentative signs that the most acute phase of the downturn may be passing. The National Land Agency reports that transaction volumes in May and June showed modest sequential improvement compared with the depths of Q1 2009, though they remain well below year-earlier levels. A small number of developers are cautiously testing market appetite for new launches at price points significantly below the 2007 peak — not yet a recovery, but a signal that some buyers are beginning to assess the market as offering value.

The National Housing Trust, which provides mortgage financing to formal-sector workers through mandatory contributions from employees and employers, has maintained its lending programmes and in some cases introduced new products designed for lower-income first-time buyers. NHT mortgages, which carry rates below commercial bank rates, have provided some insulation from the full force of the rate environment for the segment of the market that qualifies. The Trust’s pipeline of applications remains healthy relative to the commercial bank sector, pointing to continued demand among eligible borrowers when rates and confidence permit activity.

What This Means

Homeowners should begin to see their variable-rate mortgage costs moving lower as commercial banks transmit the BOJ’s rate cuts into retail products. The process is gradual, but a sustained easing cycle over the remainder of 2009 and into 2010 should meaningfully reduce monthly payment burdens. Those who fixed their rates at the peak of the cycle may want to review the terms of their mortgages when fixed periods expire.

Renters will find some relief from lower utility bills as electricity tariffs continue to reflect the fall from 2008 oil prices, and from a retail food environment that is considerably less inflationary than a year ago. The challenge is that the labour market remains weak, and wage growth in the formal sector is minimal or absent in real terms. The relief is real but incomplete.

Developers can begin cautiously to plan for a market that may be approaching its trough. Those with cash reserves and the patience to wait should be assessing opportunities — land parcels in areas of structural demand, distressed properties from overleveraged operators — that will not be available once the recovery takes hold. However, timing remains uncertain and premature launches into a still-weak market destroy value. The watchword remains patience.

Businesses dependent on domestic consumer demand face the most persistent headwind, as household incomes have been eroded by the cumulative inflation of 2007–2008 and real wage recovery is likely to lag the broader economic upturn by a year or more. Export-oriented businesses — those serving tourism, generating foreign exchange or linked to recovering commodity markets — have the best near-term prospects as the global economy stabilises.

Diaspora members should note that the U.S. job market, while still losing positions monthly, is losing them at a slower pace. The Obama administration’s stimulus spending is beginning to flow through infrastructure and public-sector contracts, providing some support for employment in the construction and public works sectors where Jamaican-Americans are well-represented. A remittance recovery is unlikely before the second half of 2009 at the earliest, but the foundations for it are being laid.

Outlook

The second half of 2009 should, on current trajectories, see Jamaica’s recession moderating if not yet ending. The pace of contraction is expected to slow as base effects from the 2008 commodity price spike begin to reverse in the data, and as the global economic stabilisation that is under way in the United States and Europe eventually translates into somewhat less severe declines in tourism and remittances.

The key near-term test is the autumn tourism booking season, which will determine whether the 2009–10 winter — Jamaica’s most important trading period — shows any improvement over 2008–09. The H1N1 pandemic, which the WHO now assesses as less clinically severe than initially feared, appears to have peaked in the northern hemisphere; its impact on the winter booking season should be limited if this assessment holds. The economy, like a long-distance runner who has made it through the hardest miles of the course, can now sense the possibility of the finishing line — even if it remains some distance ahead.

Jamaica Economic Intelligence is an independent data-driven journalism series publishing quarterly and annual reviews of Jamaica’s economy. Sources include the Bank of Jamaica, the Planning Institute of Jamaica, the Statistical Institute of Jamaica, the Jamaica Tourist Board, the National Land Agency and multilateral institutions including the IMF and World Bank. All figures are the best available estimates at the time of reporting.

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