Publication date: 5 April 2011 | Covering: January – March 2011
Quarterly Briefing
- FRESH — Japan: Magnitude 9.0 earthquake and tsunami March 11; Fukushima nuclear disaster; 20,000+ deaths; global supply chain disruption (25 days ago)
- Arab Spring: Tunisia Ben Ali flees January 14; Egypt Mubarak resigns February 11; Libya civil war begins February; Bahrain crackdown
- Portugal: Markets force bailout request April 7 (FRESH, 2 days ago); yields above 8%; third eurozone sovereign bailout
- Fed QE2: US$600bn Treasury purchases continue; 10-year Treasury 3.5% by February; reflation trade; commodity prices surge
- ECB signals rate rise: Trichet ‘strong vigilance’ language signals April hike; inflation above 2% on energy/food
- Oil: Brent rises above US$115/barrel on Libya civil war disruption; OPEC refuses emergency cut
- US recovery: Payrolls improving; unemployment 8.8% by March; housing still weak; commercial real estate stabilising
- Jamaica: IMF Stand-By; fiscal adjustment ongoing; high oil import bill; BOJ managing pressures
Japan Earthquake, Tsunami, and Fukushima
The most severe natural disaster to affect a major economy in decades struck Japan on 11 March when a magnitude 9.0 earthquake — the most powerful ever recorded in Japan and the fourth most powerful in recorded history — struck off the northeast coast and triggered a devastating tsunami that inundated hundreds of kilometres of coastline. More than 20,000 people were killed or listed as missing. The Fukushima Daiichi nuclear power plant, critically damaged by the tsunami’s destruction of its cooling systems, experienced partial meltdowns in three reactors in the most serious nuclear incident since Chernobyl in 1986, releasing radioactive material and requiring the evacuation of hundreds of thousands of people from surrounding areas. The disaster had immediate and far-reaching economic consequences: Japanese industrial production plunged, supply chains for automotive, electronics, and precision manufacturing industries worldwide were severely disrupted as just-in-time production systems proved fragile in the face of a catastrophic supply disruption. Japan’s central bank, the Bank of Japan, injected unprecedented liquidity into financial markets in the immediate aftermath, and the government launched a massive fiscal reconstruction programme. For global markets, the disaster provided a short-lived risk-off shock before the underlying global recovery narrative reasserted itself.
Arab Spring; Libya and Oil
The Arab Spring — the wave of popular uprisings against authoritarian governments across the Middle East and North Africa — accelerated dramatically through the first quarter. Tunisia’s Ben Ali had fled to Saudi Arabia on 14 January after weeks of protests. Egypt’s President Hosni Mubarak, after eighteen days of mass protests in Tahrir Square and elsewhere, resigned on 11 February and handed power to the military — the most consequential political change in the Arab world in decades. In Libya, protests against Muammar Gaddafi’s 42-year rule escalated into civil war in February, with rebel forces holding eastern Libya and Gaddafi’s forces counterattacking with heavy weapons. A UN Security Council resolution on 17 March authorised a no-fly zone, and a Western military coalition — led initially by France, the UK, and the US — began enforcing it. Libya’s civil war disrupted its oil production of approximately 1.6 million barrels per day, sending Brent crude above US$115 per barrel and raising concerns about energy costs for oil-importing economies. For Jamaica, higher oil prices directly worsened the current account deficit and added inflationary pressure.
Jamaica: IMF Stand-By; Oil Price Pressure
Jamaica’s IMF Stand-By Arrangement, in its first year of implementation, was providing a framework for fiscal discipline but the task was significant: the country’s public debt exceeded 130 per cent of GDP, interest payments consumed more than half of tax revenues, and the economy had contracted in 2009 and was growing only modestly. The surge in global oil prices driven by the Libyan civil war was a direct headwind for Jamaica, which imports all of its petroleum and whose energy import bill was already a major source of current account pressure. The Bank of Jamaica’s ability to ease monetary conditions was constrained by the need to maintain exchange rate stability and contain inflation, which was being driven by energy and food price increases. The NHT remained the primary affordable housing finance mechanism through this challenging period, with its subsidised rate tiers insulating qualifying borrowers from the elevated commercial lending environment.
Looking Ahead to Q2 2011
Japan’s reconstruction will be a major global economic theme through 2011, with supply chain disruption affecting production in multiple industries. Libya’s outcome — and its impact on oil supply — is the critical near-term commodity market variable. The ECB’s expected April rate increase signals a divergence with the Fed’s continued accommodation. For Jamaica, the oil price environment is the dominant external risk, while the IMF programme’s fiscal targets frame domestic policy conditions.
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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