Jamaica Economic Intelligence | Annual Review 2018 | January–December 2018
Key Findings
- The Federal Reserve delivers four hikes in 2018 — March, June, September and a deeply controversial December — bringing the federal funds rate to 2.25–2.5 percent, the highest level in a decade
- US equity markets suffer their worst December since 1931: the S&P 500 falls 20 percent from its September peak, Trump publicly attacks Powell, and markets price in recession risk as the year closes
- The US-China trade war becomes the defining structural force in global trade — tariffs on US$250 billion of Chinese goods, US$110 billion in Chinese retaliation, and a 90-day truce at the G20 Buenos Aires summit that offers a pause but not a resolution
- Jamaica records its fifth consecutive stopover arrivals record — approximately 2.47 million visitors — as the post-hurricane Caribbean competitive advantage extends into its second year
- Jamaica’s debt-to-GDP ratio crosses below 100 percent for the first time in the modern era, a milestone that the IMF programme’s architects identified in 2013 as the first proof that the structural transformation was real
- Unemployment ends 2018 at approximately 9.1 percent — confirmed below 10 percent for the full year, a threshold that was considered structurally unachievable as recently as 2015
It is December 19, 2018, and Jerome Powell is about to make the most consequential — and most contested — monetary policy decision of his first year as Federal Reserve Chair. The S&P 500 is down more than 15 percent from its September peak. Oil has collapsed from above US$75 a barrel to below US$50 in a matter of weeks. The White House is allegedly discussing whether the President can fire the Fed Chair — a question constitutional scholars had not been asked to answer in living memory. The President of the United States has, in the preceding weeks, publicly described the Federal Reserve as the economy’s “biggest threat,” called its chairman “crazy” and “loco,” and demanded that the tightening cycle stop. On Wall Street, strategists are already filing notes calling this the worst December for equities since 1931. And in Kingston, a data release from the Statistical Institute of Jamaica has just confirmed what the monthly readings have been suggesting all year: Jamaica’s unemployment rate is 9.1 percent. The debt-to-GDP ratio has crossed below 100 percent. The fifth consecutive tourism record is in the books. Powell hikes. Jamaica records.
Four Hikes and a Crisis of Confidence
The Federal Reserve’s 2018 policy path began in January as an orderly continuation of gradual normalisation and ended in December as the most politically embattled tightening cycle in the institution’s modern history. The March and June hikes passed unremarkably — each fully anticipated, each absorbed by markets that were, through mid-2018, still buoyed by the Tax Cuts and Jobs Act’s fiscal stimulus. The September hike — which removed the word “accommodative” from the FOMC’s statement and brought the federal funds rate to 2.0–2.25 percent, its highest since April 2008 — was also a non-event in market terms. It was what came after September that rewrote the year’s narrative.
From its peak on September 20, the S&P 500 declined steadily through October and accelerated through November and December. By Christmas Eve, the index had fallen 20 percent from its high — the technical definition of a bear market — and the Dow Jones had recorded its worst Christmas Eve performance in history. The proximate causes were multiple and contested: fears that the trade war was beginning to slow growth; rising credit spreads as corporate debt markets tightened; the collapse in oil prices, which fell more than 40 percent from their October peak; and the perception, which markets were pricing aggressively, that the Fed was making a policy error by hiking into a decelerating economy.
The December 19 hike — the fourth of the year, bringing the target range to 2.25–2.5 percent — proceeded despite the market turmoil, the presidential attacks and the explicit pleas from Treasury Secretary Mnuchin and others within the administration for a pause. Powell’s press conference attempted to signal flexibility, but the message landed badly: equities fell sharply in the press conference’s aftermath, the Christmas Eve close was the worst in living memory, and the year ended with markets pricing not further hikes but rate cuts as the most likely 2019 policy path. The Fed that had entered 2018 in a position of quiet institutional authority exited it defending its independence against an unprecedented political assault while navigating the fastest sentiment reversal in a decade.
The Trade War’s Full Architecture
If 2018’s monetary policy story was the Fed’s authority under assault, its trade story was the systematic dismantling of the multilateral trade order that had governed global commerce since the Uruguay Round. The year began with steel and aluminium tariffs in March. It escalated through the spring and summer with successive tranches of China-specific tariffs — US$34 billion in July, US$16 billion in August, US$200 billion in September. By October, the United States had tariffs in place on more than US$250 billion of Chinese goods; China had retaliated with tariffs covering the full extent of its US import capacity, approximately US$110 billion, and had moved into non-tariff measures — regulatory impediments, investment restrictions, delayed customs processing — as the limits of symmetrical retaliation became apparent.
The G20 summit in Buenos Aires on December 1 produced the year’s only significant diplomatic development: a 90-day pause in further escalation, agreed by Trump and Xi at a dinner that generated considerable interpretive uncertainty in the days that followed. The United States characterised it as a commitment by China to purchase substantially more American agricultural and energy goods, with structural negotiations on technology transfer and intellectual property to follow; China characterised it as a mutual pause with no preconditions. The gap between the two characterisations was itself a signal: the Buenos Aires truce was a ceasefire, not a settlement. The fundamental disagreement over technology transfer, intellectual property enforcement, state subsidies and market access remained unresolved, and the 90-day clock that began ticking on December 1 would define much of 2019’s policy anxiety.
The trade war’s effects on global growth were by year-end beginning to show in the data rather than remaining confined to the models. The IMF revised its 2019 global growth forecast downward in October, citing trade uncertainty as the primary headwind. Manufacturing PMIs in Germany, China, South Korea and Taiwan — the economies most integrated into the supply chains that the tariffs were disrupting — were decelerating through the second half. What had begun as a negotiating posture was, by December, functioning as a structural tax on global trade.
The EM Year: Turkey, Argentina and the Ones Who Held
The emerging market stress that defined Q3 2018’s most dramatic episodes — Turkey’s lira collapse, Argentina’s IMF emergency, the broad EM currency sell-off — moderated through Q4 as the Fed’s signalling began to incorporate flexibility and the dollar’s strength plateaued. But the year as a whole had drawn a clear line between the economies that had prepared for the tightening cycle and those that had not. Turkey’s lira ended 2018 down approximately 28 percent against the dollar — a partial recovery from the August lows but still the worst annual performance of any major currency. Argentina’s IMF programme, expanded in September to US$57 billion, became the largest in the Fund’s history; the country ended 2018 in recession, with inflation approaching 50 percent.
The year confirmed what the Q3 episode had suggested: the architecture of vulnerability that exposed emerging economies to Fed-driven external shocks — current account deficits financed by short-term capital flows, foreign-currency corporate debt, inadequate reserve cover, central banks subject to political interference — was a predictable list of characteristics rather than a set of idiosyncratic country factors. Every economy that experienced acute stress in 2018 had most or all of those characteristics. Jamaica, which had spent 2013–2017 building exactly the resilience that the 2018 EM stress episode would test, ended the year having absorbed eight Fed rate hikes since December 2015 without a single balance-of-payments disruption, a single forced policy response or a single episode of speculative pressure on the J$. The data series was conclusive. The reform had been validated by the adversity it had been specifically designed to withstand.
Below One Hundred: A Milestone That Mattered
Jamaica’s debt-to-GDP ratio crossing below 100 percent in the course of 2018 was, in the arithmetic of sovereign finance, a milestone whose significance was partly psychological and partly structural. Psychologically, 100 percent is the threshold that credit rating agencies, bond market analysts and academic economists have treated — with debatable but persistent consensus — as the level above which debt begins to constrain rather than merely represent a financing obligation. The IMF’s programme design in 2013 had identified the below-100-percent trajectory as one of the programme’s medium-term targets precisely because of what it would signal to external creditors about the sustainability of Jamaica’s fiscal adjustment. When the threshold was crossed, five years ahead of the most optimistic projections offered in 2013, the signal was received accordingly.
Structurally, the significance was larger still. A debt-to-GDP ratio of approximately 96–97 percent at year-end 2018 — down from 146 percent at the programme’s inception — meant that the annual interest burden on the national debt was falling in both absolute terms and as a share of government revenue, creating fiscal space for infrastructure investment, social services and the growth-enabling expenditures that the consolidation phase had necessarily deferred. It meant that the debt dynamics had shifted from precarious to manageable. And it meant that the experiment begun in 2013 — an IMF programme that most observers had characterised as ambitious to the point of improbability — had produced results that were not merely better than feared but better than almost anyone had publicly projected.
The Bank of Jamaica’s contribution to this achievement — through the managed depreciation policy, the reserve accumulation and the inflation-targeting transition that was transforming monetary policy from a reactive to a proactive tool — deserves equal weight alongside the fiscal consolidation in any accounting of the reform’s results. The BOJ’s August rate cut, in an environment of global tightening, had been the most visible demonstration of the monetary policy independence that five years of institutional reform had purchased. By December, with the J$ stable, reserves comfortable and inflation within target, the institution’s credibility had been established on a foundation that Jamaica’s central bank had not previously possessed in the modern era.
Five Records: The Tourism Machine Keeps Running
The Jamaica Tourist Board’s final 2018 arrivals data confirmed what the quarterly readings had been signalling all year: Jamaica recorded approximately 2.47 million stopover arrivals, a fifth consecutive annual record and an increase of approximately 6 percent over 2017’s 2.35–2.40 million. Total tourism foreign-exchange earnings were estimated at approximately US$3.2–3.3 billion — another record, and a figure that now represented a majority of Jamaica’s total merchandise and services export revenue. The transformation of tourism from Jamaica’s largest sector into the economy’s primary growth engine was, by 2018, no longer a projection but a confirmed structural shift.
The drivers of the fifth record were by now a familiar combination operating at intensified scale. The US market — still Jamaica’s dominant source, accounting for more than 70 percent of stopover arrivals — delivered another year of growth, sustained by consumer confidence that remained elevated through mid-year. The post-hurricane Caribbean competitive advantage extended into its second full year as Puerto Rico’s hotel inventory and visitor confidence recovered more slowly than official reconstruction statements had projected. European source markets — particularly German-speaking and Scandinavian visitors — continued to add volume that partially offset the UK segment’s persistent Brexit-related softness. Room nights sold were running ahead of room nights available; the demand Jamaica was generating was absorbing new supply and generating pricing power for established operators.
The Labour Market’s Historic Year
Jamaica’s unemployment rate ended 2018 at approximately 9.1 percent — the October survey reading that closed the year’s quarterly sequence. The significance of the figure was not merely its level but its consistency: for the first time in Jamaica’s modern recorded economic history, the unemployment rate had been below 10 percent for the full duration of a calendar year. Three surveys — April, July and October — had each come in below 10 percent, confirming that the sub-10 reading first achieved in July 2018 was not a seasonal aberration or a measurement outlier but a genuine structural shift in the labour market. The economy had absorbed several hundred thousand workers into employment between 2013 and 2018, and the rate at which new entrants were finding work was sufficient to sustain the headline figure below the threshold even as the labour force itself expanded.
GDP growth for 2018 was estimated at approximately 1.9 percent — a modest deceleration from 2017’s 2.0 percent but a figure that, in the context of the external environment’s deterioration through the second half, represented a resilient domestic performance. The tourism sector, construction, the business process outsourcing industry and financial services all contributed positively. Private sector credit growth continued to run above 10 percent year-on-year. The economy that had needed an IMF programme to survive in 2013 was, in 2018, generating 1.9 percent growth, below-10-percent unemployment and a sub-100-percent debt ratio simultaneously — a combination that would have seemed implausible to any analyst working from the pre-reform data.
What This Means
Homeowners close 2018 in a property market whose macroeconomic foundation has never been more solid in the modern era. The debt milestone, the unemployment record and the fifth tourism year are not coincidental — they are the compounding outputs of an economy that has systematically removed the obstacles to sustained growth. Interest rate conditions, with the BOJ having cut its benchmark and private sector mortgage credit expanding, are supportive. The external environment’s Q4 deterioration — US equity market collapse, trade war anxiety, Fed credibility questions — produced no domestic property market disruption. The insulation built through five years of reform was tested in 2018 and held. That is the most important sentence in any property market assessment of the year.
Renters have experienced, in 2018, the first full year of a genuinely tight labour market in a generation. Sub-10-percent unemployment sustained across three quarterly surveys means that bargaining dynamics in the tourism, BPO and construction sectors have shifted structurally in workers’ favour. Real wages in the lower-income segments of the formal economy are rising in ways that the 2013–2016 period did not permit. The structural housing supply gap remains the unresolved constraint. But an economy generating employment at this pace is one in which the commercial case for investing in that supply is becoming undeniable.
Developers reading the 2018 data are looking at the combination of signals that defines a generational development opportunity: sub-10-percent unemployment sustained, a fifth tourism record confirmed, debt below 100 percent for the first time in living memory, BOJ rates cut rather than hiked, and a Caribbean competitive landscape that will not fully normalise until at least 2020. The pipeline of projects announced through the reform period is executing. The pipeline being announced now is larger. The question for 2019 is not whether demand is real — the data has answered that — but whether the regulatory and infrastructure constraints that limit supply response can be addressed at the speed that the market opportunity requires.
Businesses across Jamaica close a year in which the domestic environment remained comprehensively constructive while the global environment deteriorated significantly through the second half. The US equity market’s worst December since 1931 produced no meaningful spillover into Jamaica’s credit markets, consumer confidence or business investment climate — a fact that, five years ago, would have been implausible. The trade war’s direct effects on Jamaica remain second-order; the indirect effects, through US consumer sentiment and global growth, bear watching into 2019. But a domestic economy with 9.1 percent unemployment, 1.9 percent GDP growth and a debt ratio that has just crossed a historic threshold is not one that requires external conditions to be perfect in order to function. That resilience is the reform’s deepest achievement.
Diaspora Jamaicans closing 2018 from New York, London, Toronto and Miami have watched their home economy navigate a year that humbled Turkey, broke Argentina, shook South Africa and finished with US equities in a bear market — and emerge with its fifth consecutive tourism record, its first sub-100-percent debt ratio in the modern era and its first full year of single-digit unemployment. For those who have been investing in Jamaican property through the reform years, the 2018 data is not a reason to revisit the thesis; it is a reason to increase the conviction. For those who have been waiting for the definitive proof that Jamaica’s transformation is structural rather than cyclical, five consecutive records and a historic debt milestone constitute that proof. The debate about whether to invest ended in 2018. The remaining question is positioning.
Outlook for 2019
Jamaica enters 2019 at the highest point of economic confidence in its modern recorded history — which makes the external environment’s uncertainty the year’s defining management challenge. The US equity market’s December collapse, and the recession pricing that accompanied it, was followed in early January by a significant Fed pivot: Chair Powell’s January 4 remarks indicated that the central bank was “listening carefully” to markets and that its balance sheet policy was not on “autopilot” — a reversal of the language that had accelerated December’s sell-off. Whether the pivot represents a genuine recalibration toward a pause in the tightening cycle or a tactical communication adjustment will determine whether 2019’s global financial conditions support or constrain Jamaica’s continued growth momentum.
The US-China trade truce’s 90-day clock expires in early March 2019. Whether negotiations produce a substantive deal, an extension of the truce, or a resumption of escalation will shape global growth, commodity markets and US consumer confidence through at least the first half of the year. Brexit’s parliamentary drama — the UK House of Commons is scheduled to vote on Theresa May’s Withdrawal Agreement in January — will determine whether the UK economy faces a managed transition or a no-deal cliff edge, with implications for the sterling exchange rate that affects British visitor travel budgets and, through remittance dynamics, Jamaica’s diaspora communities in the United Kingdom. The external environment for 2019 carries more uncertainty than any year since 2008.
For Jamaica, the growth question that 2018 left unanswered remains 2019’s central challenge: can an economy that has achieved stability now achieve acceleration? The debt below 100 percent creates the fiscal space that the consolidation years denied. The BOJ’s institutional credibility creates the monetary policy flexibility that the pre-reform vulnerability denied. The tourism machine and its supply chain linkages are creating private sector employment at a pace that the public sector never could have. The conditions for 3–4 percent GDP growth — the rate that Jamaica’s development aspirations require — exist in 2019 in a way they did not in 2015 or 2016. Whether the institutional capacity to capitalise on them is up to the task is the question that will define not just the coming year but the decade that follows it.
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 the full calendar year 2018.
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