Jamaica Economic Intelligence | Q2 2018 | April–June 2018
Key Findings
- The US-China trade confrontation escalates through Q2 — tariff announcements, retaliations and counter-threats define the quarter’s global trade landscape
- Italy’s Lega-Five Star coalition triggers the eurozone’s worst sovereign debt scare since 2012; Italian bond spreads blow past 300 basis points before stabilising
- The Fed raises rates on June 13 and updates its dot plot to signal four hikes in 2018 — a meaningful acceleration from its March projection of three
- Jamaica’s spring tourism season tracks ahead of 2017’s record pace; the fifth consecutive annual record is increasingly confirmed
- Jamaica presents its first truly independent national budget — the first fiscal exercise without active IMF programme conditionality since 2013
- Unemployment falls further; GDP growth continues at a pace that makes Jamaica’s post-programme transition a data-confirmed success
It is the morning of May 29, 2018, and the Italian bond market is breaking. The yield on Italy’s ten-year government debt has risen more than 150 basis points in three days — the fastest move in the eurozone’s modern history. The spread over German bunds has blown past 300 basis points. Traders who have been managing southern European sovereign risk for a decade are reaching for comparisons they hoped never to use again: 2011, 2012, the brink. The question on every trading floor in Frankfurt, London and New York is whether the Lega-Five Star coalition — eurosceptic in its instincts, unpredictable in its economics — will be the match that lights the sovereign debt bonfire that Draghi’s “whatever it takes” had appeared to extinguish. In Kingston, at the Bank of Jamaica, an economist prints the morning market data and circles the Italian spread. Then she notes the latest US-China tariff announcement. Then she checks the Jamaica Tourist Board’s weekly booking update. It is running eleven percent ahead of the comparable 2017 week. She adds the figure to the morning briefing and moves on.
Italy on the Edge: The Euro’s 2018 Scare
The political crisis that convulsed Italy through the final weeks of May 2018 had been building since March, when the general election produced a result that no established party could translate into a majority government. The Lega — a far-right nationalist party that had run on a platform of flat taxes and immigration restriction — and the Five Star Movement — a populist anti-establishment force that had made scepticism about the euro a central plank of its programme — spent seven weeks negotiating a coalition agreement whose published economic programme included proposals that market analysts calculated would add hundreds of billions of euros to Italy’s already-towering sovereign debt burden. When President Mattarella rejected the coalition’s proposed finance minister, Paolo Savona — a veteran economist who had publicly advocated preparing a contingency plan for Italy’s exit from the single currency — and indicated he would instead appoint a technocratic government, the bond market’s response was instantaneous and severe.
The two-year Italian government yield — the market’s most sensitive measure of near-term default and currency-exit risk — rose more than 150 basis points in a single day: a move of the kind not seen since the Greek debt crisis’s most acute phase. The spread between Italian and German ten-year bonds hit 305 basis points at its peak on May 29 — a level that, in 2011 and 2012, had been associated with existential questions about Italy’s membership in the eurozone. European equity markets fell sharply. The euro dropped against the dollar. Banks across the continent sold off on their exposure to Italian sovereign debt. The spectre of a rerun of the 2012 crisis — when the ECB’s commitment to unlimited bond purchases had pulled the eurozone back from the edge — was visible in every risk desk’s models.
The resolution, when it came, was more prosaic than the crisis had suggested. President Mattarella ultimately accepted the Lega-Five Star coalition’s revised ministerial list, with a different and less explicitly eurosceptic finance minister — Giovanni Tria, a university economics professor — in the key role. Giuseppe Conte was sworn in as Prime Minister on June 1, leading a government that was committed to tax cuts and increased social spending but had, at least in its initial weeks, stepped back from the most market-alarming elements of its published programme. Italian bond spreads compressed rapidly once the coalition’s composition was confirmed. Draghi’s ECB maintained its asset purchase programme and its implicit backstop function. The 2018 Italy episode did not become 2012 again. But it was a reminder that the eurozone’s political economy remained capable of producing acute sovereign stress without warning.
Trade War Declared: Tariffs, Retaliation, Escalation
The trade confrontation between the United States and China that had been announced in March’s steel and aluminium proclamations entered a qualitatively different phase in Q2 2018. On April 3, the Office of the US Trade Representative published a list of approximately 1,300 Chinese product categories — totalling approximately US$50 billion in annual imports — subject to proposed 25 percent tariffs under Section 301 of the Trade Act of 1974, citing China’s practices in technology transfer, intellectual property and innovation. China responded within twenty-four hours with its own list of US products subject to matching 25 percent tariffs worth approximately US$50 billion — targeting agricultural goods, aircraft and automobiles in a list designed to inflict political pain on Trump’s electoral base. On April 5, Trump announced consideration of an additional US$100 billion in tariffs. China said it would fight to the end.
The quarter that followed alternated between escalation and negotiation. A US delegation visited Beijing in early May; Treasury Secretary Mnuchin announced on May 20 that the trade war was “on hold” following preliminary talks, producing a brief market rally. By mid-June, the on-hold announcement had itself been abandoned: on June 15, the Trump administration confirmed that 25 percent tariffs on the first US$34 billion tranche of Chinese goods would take effect on July 6, with a further US$16 billion tranche to follow. China indicated it would implement equivalent retaliatory tariffs simultaneously. A trade war that had been announced, denied and re-announced through the quarter ended Q2 not on hold but on the brink of becoming the largest bilateral tariff confrontation since the 1930s. In Q2, the effects on global growth remained largely anticipated rather than experienced. Q3 would begin to settle the question of whether that distinction held.
For Jamaica, the trade war’s Q2 dynamics were consequential in their indirection. The island did not export manufactured goods to either the United States or China at a scale that would make it a direct target of tariff actions. But Jamaica’s bauxite and alumina sector — which exported to global markets at prices influenced by commodity cycles and Chinese aluminium production — was monitoring the confrontation’s potential effects with genuine concern. More broadly, an escalating US-China trade war that slowed global growth or reduced American consumer confidence would flow through to Jamaica’s tourism and remittance inflows with a lag that might not yet be visible in Q2 data but would shape the second-half outlook. The direct effects were absent. The indirect risks were real and accumulating.
The Fed’s New Math: Three Becomes Four
The Federal Open Market Committee’s June 12–13 meeting delivered Q2’s most consequential monetary policy development: not just the widely anticipated second 2018 rate hike — which brought the federal funds rate target range from 1.5–1.75 percent to 1.75–2.0 percent — but an updated dot plot whose median projection had shifted. Where the March FOMC projections had maintained three hikes for 2018, the June update reflected a genuine shift in the Committee’s central expectation: the majority of members now projected four 2018 increases, implying one more hike in September and one in December to bring the target range to 2.25–2.5 percent by year-end. Powell’s press conference confirmed the shift, citing the continued strength of the US labour market, inflation that had reached the 2 percent target on a twelve-month basis for the first time since the recovery began, and TCJA fiscal stimulus adding to an expansion the Committee assessed as already running above its sustainable potential rate.
For Jamaica, the Fed’s revised projection was the external monetary environment’s central variable for the remainder of 2018. The island had absorbed six rate hikes since December 2015 without balance-of-payments disruption — an achievement that had transformed the theoretical case for Jamaica’s reform programme into an empirical data series. Seven and eight would require the same architecture to perform through a higher-rate environment than any of its designers had explicitly tested. The Bank of Jamaica’s foreign exchange reserve position remained comfortable, sovereign bond spreads had compressed further from the already-improved levels of late 2017, and the J$’s managed depreciation was proceeding at its expected pace. The institutional framework was in place. The test was whether it would hold through a full four-hike year — a pace of normalisation not seen since 2005.
Jamaica’s Spring: The Fifth Year Confirmed
The April–June shoulder season — less commercially intense than the winter peak but crucial as a test of underlying demand momentum — delivered results that, by Q2 2018, felt less like surprises and more like the continuation of a structural trend. The Jamaica Tourist Board reported that spring 2018 stopover arrivals were tracking meaningfully ahead of the comparable 2017 period, itself already part of a record year. US visitor numbers were running ahead of last year’s pace, European source markets were contributing growing incremental volume, and the post-hurricane competitive advantage that had been delivering redirected Caribbean demand since Q4 2017 was showing no imminent sign of reversal. Puerto Rico’s recovery was real but slow; BVI resort capacity remained severely constrained; Saint Martin’s rebuilding was progressing but had not yet returned to pre-Irma room inventory. Jamaica was open, full, and by mid-2018 beginning to develop a permanent rather than temporary improvement in its competitive position within the Caribbean tourism hierarchy.
The UK visitor segment, a consistent negative since the Brexit referendum, was showing modest signs of stabilisation through Q2 — not recovery, but a reduction in the rate of year-on-year decline that suggested the most acute phase of the sterling purchasing-power effect on British outbound travel budgets might be moderating. European source markets — particularly Germany, Switzerland and Spain — were absorbing some of the slack, as Jamaica’s improved luxury product and competitive pricing in euros attracted visitors who had not historically been major contributors to the island’s arrival count. The Statistical Institute of Jamaica’s preliminary estimates for tourism foreign-exchange earnings were tracking ahead of 2017’s record figures on a year-to-date basis, suggesting that a fifth consecutive annual record in both arrivals and earnings was firmly on course.
Standing Alone: The First Independent Budget
The Holness government’s presentation of the 2018/19 national budget in April 2018 was, in the quiet language of institutional milestones, a genuinely historic event: the first national budget formulated and presented without active IMF programme conditionality governing its key parameters since fiscal year 2013/14. The targets — a primary surplus of 7 percent of GDP, consistent with the government’s commitment to maintain the fiscal discipline of the EFF period under the successor PLL framework and the domestic Fiscal Responsibility Framework — were not imposed from Washington but adopted voluntarily in Kingston. The budget’s content reflected the government’s own priorities: continued infrastructure investment, NHT expansion, an increase in the personal income tax threshold and the sustained fiscal consolidation that the debt-reduction trajectory required.
Credit rating agencies reviewed the budget with the scrutiny that had accompanied every IMF quarterly review, now operating without the programme’s formal oversight as a backstop to their own assessments. The verdict was broadly positive. Moody’s and S&P, both of which had been upgrading Jamaica’s sovereign credit rating through the reform period, cited the budget’s continued adherence to the fiscal framework as evidence that post-programme discipline was being maintained. Sovereign bond spreads remained compressed, and the yield on Jamaica’s US dollar bonds was at its lowest level in more than a decade. The fiscal arithmetic that had driven five years of primary surplus maintenance was beginning to reward Jamaica with the lower debt-servicing costs the whole exercise had been designed to produce. The cycle was becoming self-reinforcing in exactly the way the IMF’s programme design had intended.
What This Means
Homeowners approaching the midpoint of 2018 are doing so in a property market whose fundamentals continue to improve without the cyclical drama that global headlines suggest. The Italy scare passed; the US-China trade war’s domestic effects remain indirect; the Fed’s four-hike trajectory is being absorbed by an economy whose reform period specifically prepared it for this external environment. Mortgage rates at NHT terms remain competitive, private credit is expanding, the labour market is tightening and the tourism sector’s fifth record year is adding income and employment throughout the supply chain. The property window, open since 2015, continues to widen.
Renters are seeing the labour market improvement that has been building since 2013 begin to show up in genuine wage pressure in the sectors most accessible to lower-income workers. Tourism, retail, BPO and construction are all adding jobs and competing for workers in ways that translate into better wages, more hours and more bargaining power for the employed. The fiscal budget’s continuation of personal income tax threshold increases has delivered tangible additional take-home pay for workers at the lower end of the formal wage distribution. The housing supply gap remains the unresolved structural problem. But the incomes being generated in this labour market are the precondition for addressing it.
Developers are entering H2 2018 with the strongest combination of demand signals the Jamaican market has produced in a generation. The fifth record tourism year is confirmed as a trajectory; the Caribbean competitive landscape’s multi-year recovery timeline provides visible medium-term demand advantage; the independent budget’s maintenance of fiscal discipline removes residual uncertainty about Jamaica’s macro framework; and credit conditions remain supportive for both construction financing and end-buyer mortgages. The pipeline of projects announced in 2016 and 2017 is executing. The pipeline being announced in 2018 is larger still.
Businesses across Jamaica are watching the US-China trade war with the kind of attention the situation requires but without yet adjusting their operating decisions in response to disruption that has not materialised domestically. The trade war’s direct effects on Jamaica — a small open economy that sells tourism and services rather than manufactured goods — are second-order and lagged. The first-order effects, on US consumer confidence and global growth, are still positive through Q2 data. The first independent budget’s passage maintains the policy framework that business planning depends on. The domestic picture, in Q2 2018, is unambiguously constructive.
Diaspora Jamaicans following Q2 2018 from overseas absorbed a quarter of global drama — Italian bond market panic, US-China tariff war, a Singapore summit that produced a handshake rather than a treaty — and found, again, that the Jamaica story ran on its own track. The fifth tourism record year is confirmation that the investment case made by the reform data is not theoretical. The first independent budget is confirmation that the discipline is self-sustaining. For diaspora investors who have been building positions in Jamaican real assets through the reform period, Q2 2018 is the quarterly that looks like the one when the thesis moved from compelling to obvious.
Outlook
Q3 2018 will be the quarter when the US-China trade war moves from announcement to implementation: the first tranche of 25 percent tariffs on US$34 billion of Chinese goods took effect on July 6, with China’s retaliation simultaneous and the threat of a further US$200 billion in US tariffs hanging over the global trade system. Whether this produces visible effects on global growth, commodity prices or US consumer confidence — the channels through which Jamaica would feel a genuine trade war impact — will be Q3’s central macroeconomic question. The Fed’s projected September hike will bring the normalisation cycle to 2.0–2.25 percent, its highest level since before the global financial crisis. Jamaica has absorbed each previous step. The seventh will test the framework once more.
For Jamaica, the domestic political calendar is approaching a moment the reform’s architects had always identified as its greatest test: the proximity of the general election cycle. The Holness government’s economic achievements are formidable material for an electoral pitch. The temptation on both sides, as the electoral calendar tightens, is to offer fiscal concessions that the reform framework’s arithmetic does not sustain. Whether Jamaica’s institutional architecture — the Fiscal Responsibility Framework, the BOJ’s independence, the credit rating agencies’ scrutiny — can hold the line against electoral fiscal loosening is the defining governance question of the year’s second half.
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 2018: April–June 2018.
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