Jamaica Economic Intelligence | Q3 2009 | July–September 2009
Key Findings
- Usain Bolt shatters world records in the 100m (9.58 seconds) and 200m (19.19 seconds) at the Berlin World Championships, electrifying the globe and raising Jamaica’s international brand
- Jamaica’s recession shows its first signs of moderation as base effects from the 2008 commodity spike ease year-on-year comparisons
- Tourism decline narrows as U.S. consumer confidence stabilises and advance bookings for the winter season recover slightly
- Inflation falls toward 8% year-on-year — the lowest since 2004 — as oil holds below US$75 and food prices stay subdued
- U.S. leading economic indicators point confidently to a return to positive growth in Q3 2009, the first since mid-2008
- The IMF programme passes another review as Jamaica maintains fiscal discipline through the deepest recession in a decade
On the evening of August 16, 2009, in Berlin’s Olympic Stadium, Usain Bolt ran the 100 metres in 9.58 seconds — a margin of improvement over the existing world record that those who know the sport called unprecedented. Four days later he ran the 200 metres in 19.19, another world record. The impact on Jamaica’s economy will not show up in a single quarterly GDP figure, but the global visibility generated by those two performances — watched by billions, debated across every media platform on earth — has done more for Jamaica’s tourism brand than any marketing campaign the Jamaica Tourist Board could mount. In a quarter when the economic data offered the first tentative signs of the recession easing, the country needed that.
The Bolt Effect
The 12th IAAF World Championships in Athletics, held in Berlin from August 15 to 23, 2009, became Jamaica’s moment. Usain Bolt, already the Olympic champion and world record holder in both the 100m and 200m from the 2008 Beijing Games, arrived in Berlin as the most anticipated athlete on the planet and exceeded every expectation. His 100m final of 9.58 seconds on August 16 bettered his own world record by 0.11 seconds — a margin that track and field experts described as extraordinary in a sport where hundredths of a second typically separate records. His 200m final of 19.19 seconds on August 20 similarly obliterated his own previous mark.
The economic significance is real, if difficult to quantify precisely. A nation’s brand — its recognition, its associations, its desirability as a destination — is built over years through accumulated impressions, and a single event can compress years of brand-building into days. Every major newspaper and broadcast network in the United States, Europe and Asia led with Bolt’s performances. The name “Jamaica” and photographs of the island’s turquoise coast appeared in proximity to images of human physical excellence, speed and joy that are among the most powerful associations a destination can carry. The Jamaica Tourist Board moved quickly to leverage the moment with targeted advertising in key North American markets, using the “World’s Fastest” theme that had proven effective after Beijing.
The Jamaica team’s overall performance at Berlin reinforced the individual brilliance. Shelly-Ann Fraser, Veronica Campbell-Brown and the Jamaican relay teams added medals and further media coverage. For a small island of 2.8 million people to dominate the world’s premier sprint events against competitors from countries fifty or a hundred times its size is a story that journalists and commentators find irresistible — and every retelling mentions Jamaica.
GDP: The First Signs of Moderation
The Planning Institute of Jamaica’s preliminary Q3 data suggest that the pace of GDP contraction has slowed to approximately minus 2 to minus 2.5 per cent year-on-year, a meaningful improvement from the minus 3 to minus 4 per cent registered in the first two quarters of 2009. The improvement reflects two factors: the beginning of more favourable base effects as the sharp contraction of Q3 2008 begins to feature in the comparison period, and a genuine, if modest, slowing in the pace of decline in some key sectors.
Tourism is still declining year-on-year but the gap is narrowing. The bauxite and alumina sector remains severely depressed, but the sequential fall-off in output has stabilised at low levels as operators reduce production to manageable minimums rather than further cutting. The financial sector is generating modest positive contributions as transaction volumes, while below 2007–2008 peaks, have stopped declining further. Agriculture — benefiting from lower input costs, post-Dean crop recovery in the banana segment and improved growing conditions — is providing a positive contribution to GDP for the first time since 2007.
Tourism: The Decline Begins to Narrow
Q3 2009 stopover arrival data from the Jamaica Tourist Board indicate a year-on-year decline of approximately 4 to 5 per cent — smaller than the 7 to 9 per cent declines recorded in the previous two quarters. The improvement reflects several factors: the U.S. consumer confidence recovery that has been under way since March, modestly lower airfares as jet fuel costs have stabilised well below 2008 peaks, and the aggressive promotional pricing that has made Jamaica’s all-inclusive resorts more competitively priced against alternative destinations.
Advance bookings data for the 2009–10 winter season — the critical October-to-April period that accounts for the majority of Jamaica’s annual tourism revenue — are showing a more encouraging picture than the equivalent data at this point a year ago. Some major resort operators report forward bookings running at or close to 2008 levels for November and December, suggesting that the worst of the year-on-year decline may be behind the sector. Whether this translates into a full recovery, a stabilisation or merely a slower decline will depend on the trajectory of U.S. employment in the final months of the year.
The Bolt-effect tourism boost is expected to show up more strongly in the winter bookings than in Q3 arrivals, as the lead time between marketing exposure and actual travel typically runs to three to six months. The Jamaica Tourist Board’s data on web inquiries and promotional campaign responses showed a significant spike in the weeks following the Berlin championships, consistent with the experience after the 2008 Beijing Olympics.
The U.S. Economy Turns
The economic context outside Jamaica has shifted materially during Q3. U.S. leading economic indicators — the ISM manufacturing index, new home sales, consumer confidence and equity market performance — have all moved consistently in the direction of recovery over the quarter. The Federal Reserve’s September 2009 assessment confirmed that “economic activity has picked up following its severe downturn,” marking a formal shift in the central bank’s language from crisis management to recovery monitoring.
U.S. payrolls are still declining but at a significantly reduced pace — September 2009 job losses of approximately 263,000 compare with peak monthly losses of over 700,000 in early 2009. The unemployment rate reached 9.8 per cent in September, its highest in 26 years, but the rate of increase has slowed. For the Jamaican diaspora, the most significant immediate implication is the possibility of stabilised employment conditions through the winter — a foundation from which remittance recovery can eventually begin.
The G20’s Pittsburgh Summit in late September produced a commitment to maintain global stimulus — fiscal and monetary — until recovery is well established, reducing the risk of a premature withdrawal of support that could derail the nascent upturn. The G20’s designation as the “premier forum for international economic cooperation”, replacing the G8 and explicitly including major emerging economies, reflects the recognition that the recovery must be globally coordinated to be durable.
Inflation and Monetary Policy
The Statistical Institute of Jamaica’s September 2009 CPI data show year-on-year inflation at approximately 8 per cent — the lowest reading since 2004 and a remarkable reversal from the 25-plus per cent peak of just fifteen months earlier. The fall reflects the continued low global energy prices (WTI averaging approximately US$65–70 in Q3 2009), subdued food prices and the weak domestic demand that has removed pricing power from most sectors of the economy.
The Bank of Jamaica has continued its easing cycle through Q3, with the benchmark overnight rate reduced in each month of the quarter as the inflation outlook improved and the IMF programme provided confidence that the macroeconomic framework was broadly intact. The BOJ has communicated a medium-term inflation target in the single-digit range and a commitment to maintaining the easing trajectory as long as the fiscal adjustment remains on track and the exchange rate remains stable. The exchange rate has held in the J$87–92 range during the quarter, somewhat more stable than in the acute phase of the crisis.
Commercial bank prime lending rates have begun to decline, reflecting the lag transmission of the BOJ’s cuts. Several major banks reduced their base rates during the quarter, and the National Housing Trust announced a reduction in its mortgage rates to 5.5 to 7.5 per cent for eligible borrowers — a meaningful improvement in affordability for the segment of the market that qualifies for NHT financing.
The IMF Programme: Staying the Course
Jamaica’s second quarterly review under the IMF Stand-By Arrangement was completed during the quarter with another positive assessment. The government has maintained its primary fiscal surplus target, managed the public wage bill within commitments and continued with the structural reform agenda in tax administration. The successful completion of the second review unlocks the next disbursement tranche of programme financing, maintaining the external liquidity buffer that has been central to keeping the exchange rate broadly stable.
The political economy of the adjustment programme has, predictably, generated friction. Several public-sector trade unions have challenged the government’s wage restraint position, arguing that workers should not bear the full burden of adjustment when the causes of the crisis originated abroad and were beyond their control. The government has responded by pointing to the fiscal arithmetic — the debt-to-GDP ratio cannot be reduced without sustained primary surpluses, and primary surpluses cannot be maintained without restraining the public-sector wage bill, which constitutes the largest single component of recurrent expenditure. This argument is economically correct but politically demanding to sustain in the face of hardship.
The Property Market: First Life
The residential property market in the Kingston metropolitan area is showing the first tentative signs of recovering activity. The National Land Agency reports that transfer volumes in July and August were above the levels of the same months in 2008, though September was weaker as the new fiscal year’s budget uncertainty weighed on buyer confidence. The improvement is being led by the lower-middle and middle segments of the market, where NHT financing availability and the beginning of commercial rate reductions are improving affordability.
New development activity remains subdued, but several developers with advanced planning permissions are signalling their intention to launch in the first quarter of 2010 if the interest rate trajectory continues to improve. The north coast resort market — which depends more heavily on diaspora and foreign buyers than the domestic market — remains quiet, as diaspora purchasing power and confidence have not yet recovered enough to restore the investment appetite seen in 2005–2007.
What This Means
Homeowners are beginning to see genuine relief from the combination of lower mortgage rates and lower utility bills. Variable-rate mortgage holders should check whether their lender has passed through recent BOJ cuts, as the transmission has not been uniform across institutions. For those who have maintained payments through the difficult 2008–2009 period, the outlook is clearly improving.
Renters should find that the labour market, while still weak, is no longer actively deteriorating in most sectors. The risk of unexpected job loss remains elevated relative to 2007 levels, but the acute employment destruction of late 2008 and early 2009 appears to have passed. The moderation of inflation toward single digits means that whatever wage income is being earned is now buying more than it did a year ago.
Developers who have waited patiently through the downturn are approaching the moment when careful re-engagement begins to make sense. The combination of lower land and construction costs, improving financing conditions and pent-up demand from household formation argues for beginning the planning and approval processes for new schemes now, so that launches can be timed with the recovery rather than behind it.
Businesses in the tourism supply chain — transportation, food service, craft, entertainment — should be beginning to see less severe year-on-year declines in business volumes and may, in some segments, be approaching flat or positive comparisons. The Bolt-driven attention to Jamaica is a marketing asset; businesses that can tie their offering to Jamaica’s athletic brand and global recognition should be doing so actively.
Diaspora members face an improving employment outlook in the United States, though the unemployment rate at 9.8 per cent means that the recovery’s benefits will take time to reach all communities and sectors. Those who have maintained remittance flows through the recession have contributed to a stability in the island’s foreign exchange market that is reflected in the relative steadiness of the exchange rate during Q3. Their continued support in the coming months remains important.
Outlook
The quarter ends with the balance of risks, for the first time in two years, shifting in a positive direction. The global recession has ended, the U.S. economy is growing again, inflation in Jamaica is at a four-year low, interest rates are falling and the IMF programme is on track. Usain Bolt has given Jamaica a global marketing moment that will pay tourism dividends for years.
The challenges that remain are structural rather than cyclical. The debt-to-GDP ratio remains above 130 per cent and will require sustained primary surpluses over many years to meaningfully reduce. The bauxite sector faces a structural competitiveness challenge that a cyclical aluminium price recovery will address only partially. The sugar industry, which has been the subject of restructuring plans for over a decade, continues to decline. The fiscal adjustment required under the IMF programme is real and sustained, not a one-year emergency measure.
But the direction of travel — moderating contraction, falling inflation, easing rates, an IMF anchor, an improving U.S. economy and a global spotlight on Jamaica’s most famous athlete — offers the most positive economic backdrop that the island has faced since the 2007 hurricane season ended the mid-decade growth run. Annual 2009 data will confirm that the year was one of contraction; the question for 2010 is whether the recovery will be strong enough to begin restoring the ground that was lost.
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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