Jamaica Economic Intelligence | Q3 2016 | July–September 2016
Key Findings
- The Federal Reserve holds at its September meeting — the fourth hold of 2016 — as Trump-Clinton uncertainty freezes the global outlook
- OPEC reaches a preliminary output-freeze agreement in Algiers; Brent crude rises toward US$50 on the news
- Jamaica posts another record summer tourism season; UK visitor softness after Brexit is more than offset by North American strength
- Theresa May becomes UK Prime Minister on July 13; “Brexit means Brexit” signals prolonged negotiation uncertainty
- The fourteenth consecutive IMF EFF quarterly review is completed; Jamaica’s unbroken record now spans over three years
- Jamaica’s GDP growth tracks at approximately 1.5–2 percent; unemployment falls below 14 percent for the first time since 2007
On September 21, 2016, the Federal Reserve meets in Washington for the fourth time this year. For the fourth time, it does not raise rates. The committee has been on the verge — it feels perpetually on the verge — but Brexit has happened, and the US election is six weeks away, and the world is in one of those seasons where certainty keeps slipping just out of reach. Markets had expected a hike. They have been expecting a hike all year. In Kingston, this has become something like a standing joke in the finance ministry: every quarter that passes without a US rate hike is another quarter in which Jamaica’s debt costs stay low and its J-dollar stays calm. The irony is almost audible. The more chaotic the world becomes, the better Jamaica’s macroeconomic position looks by comparison. Not because Jamaica is lucky. Because, for once, it has done the work.
The Fed Pauses Again: Election Paralysis
The Federal Open Market Committee’s September 20–21 meeting ended as all of its 2016 predecessors had: with rates unchanged and a statement that was parsed intensely for signals about what December might bring. Chair Yellen’s post-meeting press conference struck the same careful balance between acknowledgement of US economic improvement and caution about global risks that had characterised the Committee’s communications all year. The unemployment rate had fallen to 4.9 percent, core inflation was moving toward the Fed’s 2 percent target, and consumer spending was solid. But the US election — now six weeks away, with polls suggesting a competitive race between Hillary Clinton and Donald Trump that markets could not easily model for outcome probabilities — added a layer of uncertainty that argued for patience.
For Jamaica, the Fed’s fourth 2016 hold was the fourth consecutive gift. The uninterrupted period of near-zero US interest rates had kept global capital flows into emerging markets supportive, held Jamaican sovereign spreads compressed and given the Bank of Jamaica’s Monetary Policy Committee room to hold its own rates without triggering J$ pressure from rate differential compression. The structural improvement in Jamaica’s fiscal and external position had been sufficient to make it largely immune to the kind of spread widening that affected more fragile emerging markets during episodes of global risk-off: when Brexit had jolted markets in late June, Jamaican spreads had barely moved. The September pause was more of the same — another quarter of borrowed time from the global monetary policy normalisation that would eventually arrive.
OPEC’s Algiers Accord: Oil Finds a Floor
After years of resistance to output discipline, OPEC’s informal meeting on the sidelines of the International Energy Forum in Algiers on September 28 produced something unexpected: a preliminary agreement among OPEC members to limit collective output to between 32.5 and 33 million barrels per day — effectively a freeze, and potentially the first formal cut in eight years. The announcement sent Brent crude rising toward US$50 per barrel, with Saudi Arabia and Iran — whose bilateral tensions had complicated previous discussions — both apparently acquiescing to a framework that would need to be formalised at OPEC’s November meeting in Vienna before it became binding.
For Jamaica, the Algiers accord was the first meaningful signal that the oil price environment of 2015–2016 — so beneficial for the current account, inflation and fiscal dynamics — might be approaching a floor below which further declines were unlikely. Brent had been ranging between US$42 and US$52 through most of the quarter, and the OPEC news at quarter-end firmed the upper end of that range. The Bank of Jamaica’s analysis of the import bill impact suggested that even with prices recovering modestly toward the US$50–55 range, Jamaica’s energy import costs would remain dramatically below 2013 levels. The windfall would diminish at the margin but not disappear: oil would need to return above US$80 per barrel before Jamaica’s current-account and fiscal position began to face meaningful deterioration relative to the 2015–2016 baseline.
Tourism: The Summer That Beat Brexit
The summer tourism season — Jamaica’s highest-volume period for North American family travel — delivered another record performance, confounding the post-Brexit concerns that had emerged in Q2 about the potential softening of UK visitor flows. Stopover arrivals for the July–September period exceeded the comparable 2015 quarter — itself already a record — driven entirely by growth in the US and Canadian markets that more than offset the 10–15 percent decline in UK visitor numbers that the sterling depreciation and post-referendum uncertainty had produced.
The Jamaica Tourist Board’s data showed that North American travellers were booking longer stays and spending more per visit than in previous years, with average hotel occupancy rates in Montego Bay and Ocho Rios reaching peak-season highs that approached capacity constraints across the main resort strips. The all-inclusive market — dominated by Sandals, Couples and the major Spanish-brand chains — was operating at or near full occupancy through August, generating foreign-exchange earnings that were flowing through to taxi operators, craft vendors, tour guides and the thousands of informal service economy participants whose livelihoods depended on tourism’s health. The Statistical Institute of Jamaica’s estimates of tourism’s contribution to GDP — both directly through hotels and restaurants and indirectly through transportation, retail and services — confirmed that the sector was growing faster than the overall economy, pulling GDP growth higher than the underlying domestic demand picture would have produced alone.
The recovery in UK visitor numbers was expected to be gradual rather than immediate — the structural adjustment of British household finances and travel confidence to a post-Brexit sterling would take time — but the resilience of Jamaica’s overall tourism performance demonstrated the value of a diversified source market base. The JTB’s sustained investment in the North American market through brand advertising, airline partnerships and trade relationships had produced a depth of demand that a single-market shock could not undermine. Jamaica’s tourism story, which had been building since 2012, was continuing despite everything the external environment had thrown at it.
Brexit’s Summer: May Takes the Helm
The United Kingdom’s post-referendum summer was defined by a rapid succession of political transitions. Prime Minister Theresa May took office on July 13, succeeding Cameron with a mandate to implement the Leave verdict. Her early signals — summarised in the phrase “Brexit means Brexit,” which was repeated with unusual frequency and conspicuous absence of elaboration — indicated that the UK would pursue a full departure from the EU’s single market and customs union rather than the “soft Brexit” variants that had been hoped for by financial markets and City institutions. The pound sterling remained approximately 10–12 percent below its pre-referendum level through the quarter, and the Bank of England responded to post-referendum uncertainty with a rate cut in August — the first cut in over seven years — accompanied by a new round of quantitative easing.
For Jamaica, May’s early pronouncements and the Bank of England’s easing combined to sustain the pressures on sterling that had been introduced by the referendum itself. Jamaican diaspora in the UK continued to face reduced purchasing power for JMD-denominated assets and reduced sterling remittance value when converted at post-Brexit exchange rates. The JTB had been working with UK tour operators and airline partners to develop promotional offers in sterling terms that would partially offset the pound’s reduced purchasing power for British holidaymakers — an effort that was beginning to show some effect in autumn booking data, though the full recovery of UK visitor volumes to pre-Brexit levels was expected to take at least twelve to eighteen months.
The Domestic Economy: Unemployment Breaks Through
The quarter’s most significant domestic economic development was buried in the labour force survey data that the Statistical Institute of Jamaica released in late Q3: Jamaica’s unemployment rate had fallen below 14 percent — reaching approximately 13.2 percent in the July survey — for the first time since before the global financial crisis of 2008. The decline reflected genuine private-sector employment growth rather than discouraged-worker exit from the labour force, with the tourism, distribution, construction and business process outsourcing sectors all contributing positive job numbers to the quarterly data.
GDP growth for the calendar year was tracking at approximately 1.5–2.0 percent, with STATIN’s preliminary estimates for Q2 2016 (the April–June quarter) showing the improvement being sustained across multiple sectors. The construction sector, which had contracted sharply during the 2012–2014 adjustment period, was showing consistent positive growth as residential and commercial development projects that had been deferred for years finally moved to the execution phase. The financial services sector was expanding as lower interest rates supported credit growth in the private sector for the first time in years. And the tourism sector’s record summer was adding to a services export line that was growing faster than goods exports and providing a genuine growth impulse to the parts of the economy most connected to the hotel and hospitality supply chain.
The fourteenth consecutive IMF EFF quarterly review was completed in Q3 2016 without incident, confirming that Jamaica’s primary fiscal surplus remained at the programme’s target, that structural reform implementation was continuing, and that the new Holness government’s fiscal framework was consistent with the programme’s remaining conditionality. The IMF’s staff team noted, in terms that were becoming routine by now, that Jamaica’s reform track record was exceptional and that the programme’s remaining year and a half offered an opportunity to lock in the institutional changes that would sustain the fiscal improvement after the EFF concluded.
What This Means
Homeowners in Jamaica are experiencing property market conditions that are materially better than at any point since 2008. Record tourism, falling unemployment, GDP growth and stable mortgage rates are the fundamental supports for residential property values, and all four are moving in the right direction. Transaction volumes in the Kingston metropolitan area and in the resort communities of Montego Bay and Ocho Rios are running above year-ago levels. Properties in the J$20–50 million range — the NHT sweet spot — are generating genuine competitive interest. The post-Brexit sterling weakness reduces UK-based Jamaican diaspora buying power but leaves the fundamental domestic demand picture unchanged.
Renters are seeing real improvements in their economic situation as the labour market recovery extends. Unemployment below 14 percent represents an improvement of more than three percentage points from the peak, and the job creation is concentrated in the sectors most accessible to lower-income workers. Energy costs, while no longer falling sharply, remain well below 2013 levels. Food price inflation is moderate. The structural shortage of affordable rental supply in Kingston and the major towns persists, but the income environment is improving in ways that matter for the millions of Jamaicans who will not own property in the near term.
Developers are reading the summer tourism data with the same confidence that hospitality investors have been building since 2014: Jamaica’s tourism product is resilient, diversified by source market, and growing. The Brexit impact on UK visitors is real but manageable. North American visitor strength more than compensates. For residential developers, the falling unemployment rate and the expansion of private-sector credit are creating a buyer pool that is deeper and more creditworthy than at any point since the pre-crisis period. The pipeline of middle-market residential projects that had been building since 2015 is increasingly moving from planning to execution.
Businesses in Jamaica are navigating the most favourable operating environment in nearly a decade. The combination of lower energy costs, lower borrowing rates, improving consumer confidence and a government committed to private-sector development is creating conditions in which expansion and investment decisions can be made with more confidence than at any previous point in the post-crisis period. The global uncertainty — US election, Brexit fallout, OPEC negotiations — is real but is largely an overlay on a domestic story that has become genuinely positive. The risks remain, but Jamaica’s insulation from external shocks has improved substantially.
Diaspora Jamaicans in North America are watching a summer that has validated everything the reform programme promised: record tourism, falling unemployment, GDP growth, an unbroken IMF track record now spanning fourteen consecutive reviews. For those considering property investment in Jamaica, Q3 2016 is as strong an entry signal as the data has produced. The US-dollar exchange rate against the JMD remains favourable for dollar-income earners. Mortgage rates are at multi-year lows. The economy is growing. Those in the UK are navigating a more complex picture — sterling weakness reduces purchasing power — but the fundamental investment case for Jamaican property is driven by the island’s economic fundamentals, not by sterling’s post-Brexit trajectory.
Outlook
The fourth quarter of 2016 will be dominated, at least in its first half, by the US presidential election on November 8. A Trump victory — which markets have been pricing as a low-probability outcome but which the polling has never entirely excluded — would introduce a degree of US trade, regulatory and foreign policy uncertainty that could affect global markets, capital flows to emerging markets and, potentially, the US consumer confidence that underpins so much of Jamaica’s tourism demand. A Clinton victory would represent policy continuity and be absorbed by markets as largely neutral. Either way, December’s Federal Reserve meeting — after two years of near-misses — now appears genuinely likely to deliver the rate hike that 2016 has repeatedly deferred.
For Jamaica, the fourth quarter also brings the full-year tourism outturn data, which will confirm whether 2016 has set a third consecutive stopover arrivals record, and the GDP growth estimate for the July–September period, which will provide a clearer picture of whether the economy is sustaining or accelerating its 2015–2016 growth trajectory. The OPEC deal, if it holds through Vienna in November and produces the formal cut that the Algiers accord foreshadowed, will add modest upward pressure to Jamaica’s energy import costs in 2017 but will not reverse the fundamental improvement in the country’s external position. The fourteenth consecutive IMF review confirms that Jamaica remains on track. The data, for now, speaks clearly. What happens after November 8 is a question for the whole world.
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 Q3 2016: July–September 2016.
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