Jamaica Economic Intelligence | Q2 2016 | April–June 2016
Key Findings
- Britain votes 52–48 to leave the European Union on June 23; the pound crashes, markets reel, and David Cameron resigns
- The Federal Reserve holds at its June meeting; Brexit uncertainty eliminates any remaining case for a 2016 summer hike
- Brent crude recovers from January’s US$27 floor toward US$50 as US shale output declines and OPEC talks circulate
- The Holness government delivers its first budget within IMF programme parameters; thirteenth consecutive EFF review passes
- Tourism tracks ahead of 2015’s record pace through the spring; summer bookings for July–September are strong
- BOJ holds rates steady as inflation rises modestly from its historic lows; J$ depreciation pace remains moderate
It is 4:40 in the morning in London on June 24, 2016 when David Cameron walks to a microphone outside 10 Downing Street. He is composed. He will not be the one, he says, to lead the country through what comes next. Britain has voted to leave the European Union, the project of half a century of Western integration, by 52 to 48 percent. The pound is in freefall. Global markets are haemorrhaging. In Kingston it is still night. But in a city that has survived debt crises, currency crises, and a full generation of IMF adjustment, the morning headlines have a familiar quality: somewhere far away, something very large has come apart. Jamaica has seen this before. The question, as always, is the same: how much of it reaches us?
Brexit: The Morning the World Changed
The United Kingdom’s referendum on European Union membership, held on June 23, 2016, produced a result that confounded polling, surprised markets and sent tremors through the global financial system that would continue to reverberate for years. The Leave campaign won 51.9 percent of the vote against Remain’s 48.1 percent — a margin of approximately 1.27 million votes across a total electorate of 46.5 million. The result triggered a cascade of immediate consequences: Prime Minister David Cameron announced his resignation by 8:00 a.m., the pound sterling fell more than 10 percent against the US dollar in overnight trading — the largest single-day decline in the pound since the 1970s — and global equity markets fell sharply across every time zone as trading opened through Asia, Europe and the Americas.
The financial market reaction to Brexit was severe but ultimately less catastrophic than the initial overnight moves had suggested. Global central banks moved quickly to signal their readiness to provide liquidity; the Bank of England and the ECB issued coordinated statements assuring markets of adequate funding support. Within a week, equity markets had recovered most of their initial losses, the pound had stabilised — at a level approximately 8–10 percent below its pre-referendum level, rather than the 15–20 percent collapse that some models had projected. The adjustment was real and lasting, but it was an orderly re-pricing rather than the disorderly market breakdown that the most alarming weekend commentary had implied.
For Jamaica, the Brexit result was consequential through several channels. The United Kingdom is Jamaica’s third-largest tourism source market — after the United States and Canada — accounting for approximately 15–17 percent of stopover arrivals. A weaker pound made Jamaica more expensive for British holidaymakers priced in sterling, and the uncertainty about the economic outlook in post-Brexit Britain reduced consumer confidence and discretionary travel spending. Jamaica also has significant economic ties to the UK through the Jamaican diaspora in Britain — remittances from the UK are a meaningful component of the overall inflow that supports thousands of Jamaican households. A weaker pound and a more uncertain British economic outlook would reduce the sterling value of those remittances when converted to Jamaican dollars, even if the JMD volume held steady. The Bank of Jamaica and the finance ministry would need to monitor both channels through the second half of the year.
Oil’s Recovery: From the Floor Toward Fifty
The oil price’s trajectory through Q2 2016 was one of the quarter’s most economically significant stories — and for Jamaica, a more ambivalent one than the low-price environment of the previous six quarters. Brent crude, which had bottomed at approximately US$27 in January, recovered steadily through April, May and June to approach US$50 per barrel by the quarter’s end. The recovery was driven by several converging forces: US shale oil production was declining meaningfully as the drilling rig count fell to its lowest level in years; Canadian wildfires in May disrupted Alberta oil sands production; Nigerian militant attacks reduced output in the Niger Delta; and sentiment was supported by ongoing discussion among major producers — in OPEC and outside it — about the prospect of an output freeze or cut that would accelerate the market’s rebalancing.
For Jamaica, oil at US$50 was still dramatically better than oil at US$100 — the petroleum import bill, even at the quarter’s closing price, was roughly half what it had been at the 2012–2013 peak. But the direction of travel mattered: the low-inflation, low-electricity-cost, current-account-improvement windfall that had been compounding since mid-2014 was beginning to moderate as prices recovered. The Statistical Institute of Jamaica’s CPI data showed headline inflation beginning to tick up modestly from the historic lows of late 2015 — an expected and manageable development, but one that signalled the exceptional tailwind phase was easing. The BOJ’s policy rate decisions in Q2 reflected this shift, with the Monetary Policy Committee holding its benchmark rate steady rather than continuing the easing cycle that had defined 2014 and 2015.
The Fed Blinks Again: No June Hike
The Federal Open Market Committee’s June 14–15 meeting had been approaching with meaningful market discussion of whether US economic data had improved sufficiently to justify a second rate increase. Non-farm payrolls growth through April and May had been solid, unemployment was at 4.7 percent, and core inflation was moving toward the Fed’s 2 percent target. The case for a June hike was plausible — until June 23 intervened. The Brexit referendum, scheduled for eight days after the FOMC meeting, created an uncertainty large enough that even a hawkish Committee would have been reluctant to raise rates in its immediate shadow. Chair Yellen’s post-meeting statement noted the Brexit referendum explicitly as a factor in the Committee’s deliberations, and the clear implication was that until the referendum’s outcome was known and its market impact absorbed, US monetary policy would remain on hold.
After the referendum result, a June hike was obviously off the table — and markets moved to price the prospect of any 2016 Fed hike at a low probability. For Jamaica, the cumulative effect of the Fed’s year-long pause — no hikes in January, March, April, June, and now no hike expected in July or September — was an extended period of exceptionally low global interest rates that kept borrowing costs accessible, sovereign spreads compressed and external financing conditions supportive. The contrast with the taper tantrum of 2013 was striking: Jamaica’s improved position had made the anticipated Fed tightening cycle largely a non-event from the perspective of domestic rates and the J$ exchange rate, and the Fed’s reluctance to tighten gave the BOJ further room to run its own policy according to domestic considerations.
The First Holness Budget: Growth Within the Programme
Finance Minister Audley Shaw’s first budget presentation to parliament delivered the Holness government’s economic statement for fiscal year 2016–17. The budget maintained the IMF programme’s 7.5 percent of GDP primary fiscal surplus target, confirming that the new government’s commitment to programme continuity was not merely rhetorical but operationally embedded in its fiscal planning. Revenue projections were based on continued improvement in tax compliance through the reformed Tax Administration Jamaica and modest GDP growth assumptions that the IMF judged as realistic. Expenditure priorities reflected the JLP’s stated emphasis on growth-oriented investment — infrastructure, education and private-sector enablement — within the fiscal envelope that the programme permitted.
The budget passed with the IMF’s concurrence that the fiscal framework was consistent with the EFF programme’s remaining objectives, and the thirteenth consecutive quarterly review was completed in Q2 2016 without incident. The sequential review record — now more than three years without a single waiver, missed target or off-track episode — was being noted internationally as a demonstration of institutional capacity that few observers had believed possible when the EFF was first signed in May 2013. For the IMF, Jamaica had become something genuinely rare: a programme that was delivering on its fiscal targets while maintaining political legitimacy across a change of government. The Fund’s staff reports described the programme in terms that were unusually warm for an institution known for its measured prose.
Tourism: Spring Strength, Brexit Shadow
The April–June period delivered strong tourism performance across all major metrics, with the Jamaica Tourist Board tracking stopover arrivals ahead of the comparable 2015 period. North American visitors — the dominant source market — continued their multi-year growth trend, driven by the combination of low airfares, strong US consumer confidence and Jamaica’s sustained brand equity in the mass leisure travel segment. The spring break surge in March had carried through into the shoulder season with more volume than historical norms had predicted, and summer advance bookings for the July–September peak period were tracking at record levels.
The Brexit vote introduced the one significant new uncertainty into the tourism picture. UK visitors, who typically represent approximately 15 percent of Jamaica’s stopover arrivals, would now be travelling from an economy experiencing currency depreciation and elevated uncertainty about the future. Some forward bookings from UK travel agents showed modest softening in the weeks immediately following the June 23 result — tour operators were reporting increased cancellations and reduced new bookings from British customers who were reassessing discretionary spending decisions. The JTB assessed the likely impact as manageable if contained to the remainder of 2016, but a prolonged period of sterling weakness would require Jamaica to either accept lower effective GBP-denominated yields from UK visitors or invest more heavily in competing for additional US and Canadian arrivals to offset any British shortfall.
What This Means
Homeowners in Jamaica are experiencing the property market’s most active recovery period in a decade. The BOJ’s pause in rate cutting — following a sustained easing cycle — means that mortgage rates have stabilised near their multi-year lows rather than falling further, but the level of rates remains historically attractive. Transaction volumes in the residential market are continuing to rise across all price segments. Brexit’s direct impact on Jamaican property values is modest — but diaspora Jamaicans in the UK, who represent a meaningful share of foreign buyer interest in the Jamaican property market, are now facing a weaker sterling-to-JMD exchange rate that reduces their purchasing power for Jamaican property denominated in US or JMD terms.
Renters are watching inflation edge back up from the historic lows of late 2015 as oil prices recover. The relief from lower electricity bills and fuel costs is moderating — not reversing, but no longer deepening at the pace of the previous six quarters. Employment conditions continue to improve as the macro recovery filters through to the labour market, and the tourism sector’s strong spring performance is supporting hospitality employment across the north coast. The broader affordability challenge for lower-income renters — supply constraints, limited social housing construction, high rental yields in urban areas — remains structural and unresolved by macro improvement alone.
Developers are operating in a market with strong underlying fundamentals and manageable external uncertainty. The Brexit vote introduces some caution around UK-linked projects — particularly hotels and resorts that have relied on British package tourism as a primary demand driver — but the resilience of North American visitor volumes provides adequate support for most hospitality investment cases. The residential development pipeline is being shaped by the improving NHT mortgage environment and rising buyer confidence; middle-income housing in Portmore, Spanish Town and the major parish towns is showing the kind of transaction volume that makes development economics viable for the first time since 2008.
Businesses are monitoring the Brexit fallout for implications that go beyond tourism. Jamaica’s trade with the UK directly is limited, but the secondary effects — UK economic slowdown reducing demand for Jamaican exports, diaspora remittances from the UK declining in JMD terms, global risk-off sentiment affecting EM financing conditions — are worth tracking through the remainder of the year. The domestic macro environment remains constructive: lower borrowing costs, improving consumer demand, a government focused on growth and business environment improvements. The Brexit uncertainty is a global overlay on an otherwise positive local story.
Diaspora Jamaicans in the United Kingdom are processing a result that has profound implications for the political and economic context of their lives in Britain — implications that go well beyond the Jamaican property investment calculus. For those with sterling income and JMD or USD property aspirations, the weaker pound reduces purchasing power. For those monitoring the health of the UK economy and its labour market as a determinant of remittance capacity, the Brexit uncertainty adds a new risk to projections. For those with British citizenship or residency as a foundation for their long-term plans, the question of what the UK’s post-Brexit relationship with Europe — and with the Caribbean — will look like is genuinely open in ways that it was not before June 23.
Outlook
The third quarter will test whether Brexit’s immediate market trauma translates into lasting economic damage for the UK and Europe — and through them, for Jamaica. The initial recovery in global equity markets suggests markets are pricing a managed disruption rather than a systemic crisis, but the true economic impact of the UK’s departure from the European Union will take months or years to manifest in trade, investment and growth data. For Jamaica, the most immediate watch items are UK visitor arrival data through July and August, sterling remittance flows and any changes in UK travel agent booking patterns.
The US election, now entering its most intense phase, is the other major external variable. Donald Trump’s emergence as the presumptive Republican nominee — confirmed by his effective clinching of the nomination at the June primaries — has introduced a degree of US policy uncertainty that would have been difficult to model a year ago. For Jamaica, a US election that generates significant market volatility or policy uncertainty in H2 2016 would be another external headwind on top of Brexit. Domestically, the fourth quarter will bring the fourteenth IMF review, the summer tourism outturn data and the first GDP estimates that reflect the Holness government’s economic management. If those numbers hold the course that 2015 established, 2016 will be another year of consolidation and quiet progress — even if the world outside seems determined to provide drama in abundance.
Jamaica Economic Intelligence is an independent data-driven journalism series tracking Jamaica’s economic performance across the housing, tourism, fiscal and monetary sectors. Historical data drawn from Bank of Jamaica, Statistical Institute of Jamaica, International Monetary Fund and Jamaica Tourist Board publications. This report covers Q2 2016: April–June 2016.
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