Jamaica Economic Intelligence | Q1 2018 | January–March 2018
Key Findings
- Jerome Powell is sworn in as Federal Reserve Chair on February 5 — his first day coincides with the largest single-day Dow point decline in history
- February’s market correction wipes ten percent from US equities in two weeks before markets stabilise; Jamaica’s economy absorbs the shock without disruption
- The Fed raises rates on March 21 — the first of what will be four 2018 hikes — bringing the federal funds range to 1.50–1.75 percent
- Trump signs steel and aluminium tariff proclamations on March 8, opening the first chapter of a trade confrontation whose full scale is not yet visible
- Jamaica’s winter tourism season runs ahead of 2017’s record pace — the fifth consecutive year of growth is firmly on track
- The first full quarter without IMF programme oversight passes without incident; the post-programme fiscal framework holds
It is February 5, 2018, and Jerome Powell has been Federal Reserve Chair for exactly one day. On the trading floors of New York, a number called the VIX — the market’s own measure of its fear — is spiking past 37. The S&P 500 is falling faster than it has since 2011. The Dow Jones Industrial Average closes down 1,175 points: the largest single-day point decline in its hundred-and-twenty-two-year history. A category of financial products called volatility-linked exchange-traded notes — instruments that had profited handsomely from the long calm of the post-2013 bull market — are being destroyed in after-hours trading, some losing 80 percent of their value before their issuers liquidate them entirely. In a matter of hours, trillions of dollars in global equity market value have been erased. And in Montego Bay, the evening shift is arriving at the resort corridor on the north coast. The occupancy rate tonight is above 95 percent. The guests checked in three days ago. Their next booking is already made, for October.
Powell’s Baptism: The Day Markets Broke
The proximate cause of February’s correction was a number: the average hourly earnings figure in the US non-farm payroll report released on February 2, which showed wages growing at 2.9 percent year-on-year — the fastest pace since the recovery began. For markets that had spent years worrying about inflation being too low, the report triggered the opposite fear: that inflation was accelerating toward the Federal Reserve’s 2 percent target faster than anticipated, that the Fed would need to tighten more aggressively than its “dot plot” had suggested, and that the long era of near-zero rates that had underpinned asset valuations across every class was ending faster than those assets’ prices had accounted for. Bond yields, which had already been drifting higher through January, spiked sharply: the US ten-year Treasury yield hit 2.85 percent in the days that followed — levels not seen since early 2014.
What turned a correction into an episode was the unwinding of the so-called “short volatility” trade — a crowded position, accumulated over years of low-VIX markets, in which investors had been systematically selling volatility as a yield-enhancement strategy. When the VIX spiked, those positions were destroyed with a speed and completeness that even seasoned market observers found shocking. The VelocityShares Daily Inverse VIX Short-Term ETN — known by its ticker XIV — lost approximately 80 percent of its value in after-hours trading on February 5 and was subsequently liquidated by its issuer. Similar products followed. The cascade effect amplified what might have been a routine correction into a single day of genuinely historic dimension: the Dow’s 1,175-point decline was, in point terms, the largest in the index’s history, though in percentage terms it was less than 5 percent — dramatic but not catastrophic. By mid-March the S&P had recovered most of its losses. The correction was real; its permanence was not.
Jerome Powell — who had been confirmed by the Senate 84–13 and sworn in as Fed Chair on the morning that the Dow opened its historic collapse — found himself, on day one of his tenure, presiding over the most volatile day in US equity markets since 2011. The market had not been reacting to anything Powell had said or done: the correction had been building from the wage data. But the optics were vivid. His subsequent congressional testimony, on February 27, struck a notably confident tone about the US economic outlook — markets briefly dipped on fears that his optimism implied four 2018 hikes rather than three — but the overall message was one of continuity with Yellen’s gradualist approach. Powell was not, it became clear through Q1, going to be spooked by volatility into departing from the careful, data-driven normalisation that had characterised the Fed since 2015.
March’s Hike: Powell’s First, the Year’s First
The Federal Open Market Committee’s March 20–21 meeting delivered the year’s first rate increase — and Powell’s first as Chair. The FOMC raised the federal funds rate target range from 1.25–1.5 percent to 1.5–1.75 percent, a decision that was unanimously anticipated by markets and accordingly produced little immediate reaction. Powell’s press conference struck the measured, confident tone that his congressional testimony had previewed: the US economy was performing well, the labour market was strong, inflation was approaching the 2 percent target, and the Committee’s expectation of gradual normalisation remained unchanged. The updated “dot plot” maintained the median projection of three hikes for 2018, though a slight migration in individual member projections toward four hikes was noted by analysts as a signal that the pace could accelerate if incoming data continued to surprise to the upside.
For Jamaica, the March hike was the sixth Fed increase since the normalisation cycle began in December 2015 — and, like each of the previous five, it passed without producing a balance-of-payments crisis, a J$ emergency or a forced response from the Bank of Jamaica. The BOJ maintained its policy rate steady through Q1 2018, reflecting a domestic monetary stance that balanced inflation modestly above target against a credit cycle accelerating toward 10 percent private sector growth that did not yet require the brake. The J$ continued its managed depreciation at the orderly pace markets had come to expect — approximately 5–7 percent annual decline against the US dollar — with the BOJ intervening as needed to smooth volatility without fighting the direction of adjustment. The architecture built through five years of IMF programme discipline was doing exactly what it had been designed to do: absorbing the external environment’s shifts without translating them into domestic crises.
The Trade War’s First Shot
President Trump signed proclamations imposing tariffs of 25 percent on steel imports and 10 percent on aluminium imports on March 8 — the opening move in what would become the most consequential restructuring of global trade rules since the 1930s. The administration cited national security grounds under Section 232 of the Trade Expansion Act of 1962, a justification that trading partners immediately contested as a legal fiction designed to circumvent WTO dispute-settlement disciplines. Canada and Mexico were initially exempted pending NAFTA renegotiation; the European Union, Japan, South Korea, Brazil and other major exporters were not, and most announced retaliatory tariffs on American goods. China — identified in the administration’s trade strategy documents as the primary strategic competitor — had not been singled out specifically in the steel and aluminium action, but its response when it came would be targeted, proportional and calibrated to escalate through the spring and into the summer.
Jamaica’s direct exposure to the steel and aluminium tariffs was limited: the island is not a significant exporter of either commodity to the United States, and its imports of both for construction and manufacturing use were primarily sourced from regional suppliers outside the tariff’s immediate scope. The more consequential question was medium-term: whether a US-China trade confrontation that escalated into a full tariff war would slow global growth, disrupt supply chains or — most critically — dampen the American consumer confidence that was the engine of Jamaica’s tourism machine. In Q1 2018, the US consumer showed no signs of responding to trade war headlines with travel austerity. The bookings for Jamaica’s summer season were running ahead of the 2017 comparable. The trade story’s implications for Jamaica were a second-half question, not yet a present reality.
Tourism: The Fifth Year in Motion
The January–March period — Jamaica’s peak winter tourism season, dominated by North American family travel, snowbirds and the corridor from Valentine’s Day to spring break — delivered what the 2017 Q4 post-hurricane surge had promised: a fifth consecutive year of record-setting arrivals was firmly underway. The Jamaica Tourist Board reported that winter 2018 stopover arrivals were tracking meaningfully ahead of the comparable 2017 period, itself already a record, across all major source markets. The drivers were familiar in their combination — underlying US market growth, post-hurricane redirection from competitors still rebuilding, and the income effect of the Tax Cuts and Jobs Act, which had delivered larger paycheques and larger tax refunds to the American middle-class consumers who filled Jamaica’s all-inclusive resorts through January and February — but familiar does not mean exhausted. Each of these drivers had runway remaining.
Puerto Rico’s reconstruction, now eighteen months after Maria’s destruction of its electrical grid and tourism infrastructure, was still in its early stages. The island was operating at significantly reduced hospitality capacity, and the confidence of North American visitors had not yet fully returned. The British Virgin Islands’ resort economy was similarly constrained by the scale of Irma’s damage and the pace of rebuilding. For Jamaica, whose hotel inventory had been expanding continuously through the construction pipeline running since 2015, the competitive advantage created by the 2017 hurricane season was now entering its second year with no sign of rapid reversal. Total foreign-exchange earnings from tourism in 2018 were, on the Q1 trajectory, heading for a fifth consecutive record — the kind of sustained outperformance that had begun to change the structural character of Jamaica’s current account from a source of chronic vulnerability to something approaching a genuine growth engine.
The First Quarter on Its Own
Q1 2018 was the first full quarter in which Jamaica managed its economic affairs without the architecture of an active IMF programme. The Extended Fund Facility had ended on September 29, 2017. The Precautionary and Liquidity Line was in place as a backstop and signal, but it imposed no quarterly review targets, no staff monitoring visits and none of the granular programme benchmarks that had governed the island’s fiscal management for four and a half years. For the first time since May 2013, the Jamaican government set its own fiscal targets, reported to its own institutions and was accountable to its parliament rather than to a quarterly mission from the Fund’s Western Hemisphere Department.
The first quarter’s fiscal indicators suggested that the primary surplus was tracking at or above the government’s committed level — consistent with the Fiscal Responsibility Framework embedded in law and with the PLL’s requirements. GDP growth indicators for Q1 2018 were pointing to continued expansion in the 1.5–2.0 percent range, sustained by the tourism surge, continuing construction activity and the private sector credit growth beginning to accelerate through the domestic banking system. The Statistical Institute of Jamaica’s labour market data showed unemployment continuing its downward trend from the October 2017 reading of 11.7 percent, as further quarters of growth pulled more Jamaicans into employment. The institutional architecture of the reform period — the fiscal rules, the reformed Bank of Jamaica, the strengthened tax administration — was functioning in exactly the way its architects had intended: as a self-sustaining system that did not require external enforcement to operate.
What This Means
Homeowners are entering the spring of 2018 in a property market whose fundamentals remain as supportive as they have been at any point in the modern era. February’s correction in US equity markets — dramatic in point terms, ultimately modest in percentage terms — produced no spillover into Jamaican property values or mortgage market conditions. Interest rates remain at historically supportive levels for property financing, NHT mortgage accessibility continues to improve, and the labour market’s continued tightening is generating the household income growth that converts aspiration into purchase decision. The external market’s noise in February did nothing to alter the domestic property story.
Renters are receiving the clearest signals yet that the labour market is moving in their favour. An unemployment rate trending steadily downward from 11.7 percent, with tourism and BPO sectors actively expanding their workforce into early 2018, means lower-income workers are finding more options — and finding them with better bargaining power than they had two years ago. Energy costs remain stable. The structural housing supply gap continues to be the defining affordability constraint that macroeconomic improvement alone cannot resolve. But the improvement is real, and its effects on household incomes are being felt across the economy.
Developers are reading Q1 2018’s tourism numbers with a clarity that should accelerate capital commitment. The fifth consecutive record year is on track. The Caribbean competitive landscape remains favourable beyond this season and into 2019. US consumer confidence, buttressed by the TCJA’s income effects, is near an eighteen-year high. The Jamaican government’s regulatory simplification programme continues to reduce the timeline from planning to execution. For developers with hospitality or residential projects at the decision stage, the external environment has rarely been more supportive, and the case for moving now rather than waiting for further clarity has never been stronger.
Businesses across Jamaica are navigating an external environment that is somewhat more uncertain than it was at the start of the year — the equity correction, the trade tariff announcements, the persistence of Brexit uncertainty — without any of those uncertainties yet materialising as headwinds to Jamaica’s domestic conditions. US consumer spending is strong. Remittances are running at elevated levels. Domestic credit is expanding. The lesson of the past five years is that global uncertainty is a permanent condition, not a temporary state to wait out: Jamaica’s domestic reform track record is now the more reliable anchor than any reading of the macro environment from outside.
Diaspora Jamaicans monitoring Q1 2018 from North America watched, with the rest of the world, as February’s correction wiped trillions from global equity valuations in a matter of days. For those with significant exposure to US equity markets through pension funds and savings accounts, it was a direct financial event. For those with property investment horizons in Jamaica — who measure returns in real assets over multi-year periods rather than mark-to-market volatility — the correction was background noise. The fundamentals driving the Jamaican property case were unchanged on February 6 from what they had been on February 4. The noise of markets and the substance of an economy’s reform record are, in the end, different things.
Outlook
Q2 2018 will be shaped by two converging narratives: whether the US-China trade confrontation that began with March’s tariff proclamations escalates into something with visible effects on global growth, and whether Jamaica’s spring season confirms that the fifth consecutive record year is headed for meaningful rather than marginal outperformance of 2017’s total. The Fed’s next projected hike — June — will come from a committee beginning to consider whether three 2018 hikes remains the right pace or whether the TCJA’s fiscal stimulus and continued labour market strength justify a faster tempo. Three hikes was the December 2017 consensus; four is becoming the market conversation. Jamaica has absorbed six without incident; seven or eight would be a different test of the insulation that the reform period has built.
For Jamaica, the deeper question of 2018 is not any quarterly data series but whether the post-programme transition is permanent. The fiscal responsibility framework works if governments facing political pressures choose to maintain it. The BOJ’s independence works if monetary policy remains grounded in data rather than electoral considerations. The structural reforms work if the public bodies, the tax administration and the governance improvements that the programme required are sustained rather than progressively diluted. Q1 2018 was the first full test: a quarter of entirely self-imposed discipline. It passed. The question — for the remainder of the year and beyond — is whether that pass reflects the institutionalisation of reform or merely its momentum.
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 Q1 2018: January–March 2018.
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