Jamaica Economic Intelligence | Q2 2017 | April–June 2017
Key Findings
- Emmanuel Macron defeats Marine Le Pen in France on May 7; the European populist wave that followed Brexit and Trump does not sweep Paris
- Theresa May calls a snap UK election on June 8 seeking a stronger Brexit mandate — she loses her majority and is left governing with DUP support
- The Federal Reserve raises rates again on June 14, the second 2017 hike, bringing the federal funds target to 1.0–1.25 percent
- Jamaica completes its seventeenth consecutive IMF EFF quarterly review; the programme’s conclusion in May 2018 is now twelve months away
- Spring tourism runs ahead of 2016’s record pace; the full year is on track for a fourth consecutive record in stopover arrivals
- Jamaica’s debt-to-GDP ratio falls below 110 percent — a symbolic milestone in the reform programme’s debt reduction trajectory
On the evening of May 7, 2017, in the courtyard of the Louvre in Paris, a thirty-nine-year-old former investment banker who had never held elected office walks toward a podium as the new President of France. The Ode to Joy plays. Tens of thousands cheer. Somewhere in the capitals of Europe, treasury officials and central bankers allow themselves a quiet exhale that has been building since June 2016. The wave that Brexit and Trump seemed to herald — the populist surge that was going to remake Western democracies one by one — has broken against the Palais Royal and receded. Not extinguished, perhaps. But stopped, for now, in the country where it mattered most. In Kingston, the finance ministry’s economists note it, log it, factor it into their external environment assessment, and return to the numbers. Because for an economy that has spent four years proving that discipline outlasts drama, one more piece of global chaos averted is simply confirmation that the work continues to matter.
Macron’s France: The Wave That Broke
Emmanuel Macron’s victory in the French presidential election was the defining political event of Q2 2017 — and, in its way, the defining counter-narrative to the twelve months of political disruption that had preceded it. The first-round result on April 23, which put Macron’s centrist En Marche! movement against Marine Le Pen’s National Front in a run-off, had already suggested that France would not follow the Brexit-Trump script. The May 7 second round confirmed it: Macron won approximately 66 percent of the vote to Le Pen’s 34 percent — a margin wide enough to represent a genuine democratic mandate rather than merely a rejection of Le Pen. His subsequent decisive victory in the June legislative elections, which gave En Marche! an outright majority in the National Assembly, meant that France would enter the second half of 2017 with a new government possessed of both the mandate and the parliamentary numbers to attempt ambitious economic reform.
For global financial markets, Macron’s victory was the signal that the post-2016 populist wave had structural limits — that electorates that had experienced the consequences of Brexit in real time, watching sterling fall, watching UK growth slow and UK businesses pause investment, were not necessarily ready to replicate the experiment in their own countries. The eurozone sovereign debt market — where the premium on French bonds over German bunds had been widening in the months before the election as investors priced a non-trivial Le Pen win probability — snapped back sharply on the Macron result, and the broader European equity markets outperformed through the quarter. For Jamaica, whose financing costs were influenced by global risk appetite and the health of European sovereign markets, the stability in eurozone markets was a secondary positive — one of the many background conditions that kept the external environment from becoming an active headwind to the island’s continued economic progress.
May’s Miscalculation: The Snap Election That Backfired
If Macron’s election was the quarter’s most reassuring political event, Theresa May’s snap UK general election was its most disruptive. May had called the election on April 18, citing the need for a stronger parliamentary mandate as she entered the most consequential negotiations in British post-war history. The initial polling gave the Conservatives a lead of 20 or more points over Jeremy Corbyn’s Labour Party; the election looked like a formality. What happened instead was one of the most dramatic reversals in British electoral history. The Conservatives lost thirteen seats, falling from 330 to 317 — below the 326 required for an outright majority. Labour gained thirty seats. The result was a hung parliament that May had explicitly called the election to avoid.
The political consequence was a Conservative government propped up by a confidence-and-supply agreement with Northern Ireland’s Democratic Unionist Party — a relationship that introduced its own complications into the Brexit negotiation, where the question of the Irish border was already one of the most technically complex issues on the table. For financial markets, the result meant continued political uncertainty in the UK: a weakened Prime Minister, a restive parliamentary arithmetic and a Brexit process that was now beginning from a position of domestic instability rather than the unified national purpose that May had sought. Sterling fell on the election night count and remained volatile through the remainder of the quarter. For Jamaica, the persistence of UK political uncertainty was a familiar condition by now — and the direct economic implications, primarily through UK tourist flows and diaspora remittances, were being managed by an economy that had demonstrated its ability to absorb external shocks without losing momentum.
The Fed’s Second Move: June Delivers
The Federal Open Market Committee’s June 13–14 meeting delivered exactly what its March decision and its subsequent communications had signalled: a second 2017 rate increase. The FOMC raised the federal funds rate target range from 0.75–1.0 percent to 1.0–1.25 percent — the fourth increase in a decade — noting the continued strength of US labour market conditions and progress toward the 2 percent inflation target. Chair Yellen’s press conference struck a confident tone, and the updated “dot plot” maintained the projection of one further 2017 hike, confirming that the three-hike pace the Committee had projected in December 2016 remained its central case. The decision was widely anticipated and the market reaction was orderly.
For Jamaica, the June hike was the second proof point that the Fed normalisation cycle the country had been anticipating since 2013 could be absorbed without crisis. Jamaican sovereign bond spreads remained compressed. The Bank of Jamaica’s foreign exchange reserve position was comfortable, and the J$ depreciation trajectory was running at the orderly pace — approximately 5–7 percent annual decline — that markets had come to expect. The contrast with the taper tantrum environment of 2013 was now sufficiently established to constitute a genuine data series: four years of Fed tightening signals, two rate hikes in 2016, two more in the first half of 2017, and Jamaica had not experienced a balance-of-payments crisis, a sovereign spread blowout or a forced central bank interest rate response. The reform programme was doing what it had promised to do — building the insulation against external shocks that Jamaica’s pre-2013 vulnerability had denied it.
The Programme’s Penultimate Review
Jamaica completed its seventeenth consecutive IMF EFF quarterly review in Q2 2017, the penultimate review in a programme that had defined the island’s economic management for four years. The review confirmed all fiscal targets met, all structural benchmarks in compliance and all macroeconomic indicators moving in the direction that the programme design had intended. The primary fiscal surplus was being maintained at the 7.5 percent of GDP target. The debt-to-GDP ratio — which had peaked above 140 percent when the programme was signed in 2013 — had fallen to approximately 108 percent, its lowest level in more than a decade, and the IMF’s projection for end-2018 was now comfortably below 105 percent. The downward trajectory that had seemed aspirational in 2013 was now a fact of Jamaica’s fiscal arithmetic.
The IMF’s quarterly review communications for Q2 2017 had an unusual quality: they were reading as something between an assessment and a valediction. The staff team noted that Jamaica’s reform achievement was “unprecedented” in the Fund’s experience of Caribbean programme countries, and that the institutional changes embedded in the programme — the fiscal responsibility framework, the reformed public body governance structure, the strengthened tax administration — had demonstrated a durability that gave the Fund “confidence” in the sustainability of the adjustment beyond the programme’s scheduled conclusion. These were not the words of an institution preparing to walk away from a troubled case; they were the words of an institution preparing to declare a success. The final review — the eighteenth — was scheduled for Q3 2017. After that, for the first time in four years, Jamaica would be managing its economy without quarterly IMF oversight. The successor Precautionary Standby Arrangement that had been in discussion for months was now moving toward finalisation as the mechanism through which the IMF’s engagement would continue in a lighter-touch form.
Tourism: The Spring That Confirmed the Trend
The April–June period brought the shoulder season that follows Jamaica’s peak winter and precedes its high-summer North American family travel surge — and the Jamaica Tourist Board’s data showed the shoulder performing with a consistency that would have been remarkable even five years earlier. US visitor arrivals were running meaningfully ahead of the comparable 2016 period, driven by the combination of competitive airfares, strong US consumer confidence and the continued strength of Jamaica’s brand position in the mass leisure travel market. The question that had been raised in Q1 — whether Trump-era travel apprehension might damp American outbound tourism — was being answered in the spring data: US visitors were travelling internationally, and Jamaica was benefiting from its established position in the North American consumer’s choice set.
UK visitor numbers remained soft, as expected given sterling’s sustained post-Brexit weakness. Approximately 15 percent below the pre-referendum year-on-year comparison, UK arrivals were a consistent headwind — but a headwind that the JTB had learned to absorb through intensified marketing in the North American market and through the gradual development of European source markets that had been underweighted relative to their potential. German and Spanish visitors, attracted by Jamaica’s improving luxury product and the competitive rates available in euros, were adding incremental volume that partially offset the British shortfall. The tourism sector’s ability to diversify its source market base in real time — matching demand growth where it existed to compensate for weakness where it did not — was one of the structural improvements that the five years of sustained investment in JTB marketing and airline partnerships had produced.
The Domestic Economy: Momentum Holds
The Statistical Institute of Jamaica’s GDP data for the first quarter of 2017 — released in Q2 — showed the economy growing at approximately 1.8–2.0 percent year-on-year, the strongest quarterly growth reading since the reform programme began. The improvement was broad-based: tourism and related services contributed their now-familiar positive impulse, construction was adding growth for a fourth consecutive quarter as the pipeline of residential and commercial projects continued to execute, and the business process outsourcing sector — one of Jamaica’s quiet success stories through the reform period — was expanding its Kingston footprint and its contribution to services export earnings. The agricultural sector, which had struggled with drought conditions in previous years, was recovering to more normal production levels.
The Bank of Jamaica held its policy rate steady through the quarter, maintaining the position it had established at the start of the year. Inflation was running in the 4.5–5.5 percent range — modestly above the BOJ’s target band but not at a level that demanded immediate policy response. The J$ exchange rate was depreciating at its managed pace. Credit growth in the private sector — the key transmission mechanism through which lower interest rates eventually stimulate investment and consumption — was accelerating modestly from the low levels of the adjustment period, a sign that the monetary easing of 2014–2016 was beginning to show up in bank balance sheets. For the first time since the programme began, the domestic economy was generating demand that was not entirely the product of external tailwinds and fiscal adjustment — it was beginning to come from within.
What This Means
Homeowners are approaching the back half of 2017 with a property market that is demonstrating genuine, broad-based recovery. The combination of falling unemployment, improving private-sector credit growth and continued GDP expansion is creating buyer demand across all segments of the residential market — not just the luxury end that external buyers support, but the NHT-financed middle-market housing where the majority of Jamaicans’ property decisions are made. The macroeconomic case for property ownership has not been this strong since before 2008, and there is no obvious catalyst on the domestic horizon that would reverse it.
Renters are experiencing the accumulated effect of five consecutive years of moderate inflation and improving employment — a combination that, for the employed majority, has produced genuine real income gains over the period. Electricity costs, while no longer falling, are stable at levels well below the pre-2014 peak. The private rental market in Kingston and the major towns remains supply-constrained, keeping rents elevated relative to incomes, but the structural case for expanded social housing supply is being made more urgently by a government that has identified housing as a priority. The translation of that stated priority into tangible supply is the test that the Holness administration will face through 2018.
Developers can read Q2 2017 as the clearest possible validation of the multi-year investment thesis for Jamaican residential and hospitality development. GDP growth above 1.5 percent, unemployment at multi-year lows, tourism on pace for a fourth consecutive record, private credit expanding — every indicator that matters for a developer’s demand assessment is moving in the right direction. The JLP government’s regulatory simplification programme is reducing the friction in the planning approval process. The NHT’s expanded mortgage accessibility is deepening the buyer pool for middle-market projects. The development pipeline that has been building since 2015 is increasingly executing.
Businesses across Jamaica are entering the second half of 2017 with improved confidence in both the domestic and external environment. Macron’s victory has reduced the tail risk of a European political crisis that would have affected global markets and Jamaica’s financing environment. The Fed’s orderly tightening is being absorbed without disruption. Domestically, the tax administration reforms that the IMF programme required are making compliance more straightforward and the overall business environment more predictable. The BPO sector’s continued expansion is demonstrating that Jamaica can compete for global services business on the basis of skills and cost — a model for the kind of economic diversification that tourism alone cannot provide.
Diaspora Jamaicans monitoring Q2 2017 from the UK are processing a political environment that has become more uncertain, not less, following May’s election miscalculation. The DUP-backed Conservative minority government is a fragile vessel for the Brexit negotiation — and a fragile negotiating partner produces an uncertain outcome for the question of UK-Jamaica trade and mobility arrangements post-March 2019. Those with assets in Jamaica are watching the UK political situation with the same attention they gave the Brexit referendum — and drawing the same conclusion: that Jamaica’s economic fundamentals, now demonstrated through four years of reform, are a more reliable anchor than the sterling exchange rate or the UK political calendar. North American diaspora are watching US economic strength continue to translate into visitor arrivals and remittance capacity, and the case for property investment on the island is being made by the data itself.
Outlook
The third quarter will be dominated, for Jamaica, by two milestones that the island has been working toward for four years: the completion of the IMF EFF programme’s eighteenth and final quarterly review, and the full-year tourism data that will confirm — or not — whether 2017 has delivered a fourth consecutive stopover arrivals record. Both outcomes are widely expected to be positive; the question is the margin, and what the data will look like as the island transitions from a reform story into what the IMF’s own communications have been calling a growth story. The successor Precautionary SBA, when announced, will tell the market that Jamaica is not simply walking away from external discipline but deliberately building a lighter-touch version of it into its post-programme governance architecture.
The external environment carries one variable that Q2 could not yet price: the Atlantic hurricane season, which runs from June 1 to November 30 and whose activity level cannot be known until it is underway. The National Oceanic and Atmospheric Administration’s seasonal forecasts for 2017 were calling for an above-normal season — a development that, if it materialised in the form of major storms affecting Jamaica’s key source markets or the island itself, would have implications for Q3 tourism arrivals and the broader economic momentum that the year’s data had been building. Jamaica has not suffered a direct major hurricane hit in the modern reform period; the question of how the island’s improved fiscal and economic position would respond to such a shock was one that every responsible economic planner was keeping in view. The summer of 2017 would test whether the external environment matched the internal progress that the data had been promising.
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 2017: April–June 2017.
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