Jamaica Economic Intelligence | Q3 2022 | July–September 2022
Key Findings
- The Federal Reserve raises its policy rate by 75 basis points in both July and September, reaching a target range of 3.00–3.25 percent by quarter-end — a level not seen since 2008; Jerome Powell’s August 26 speech at Jackson Hole removes any residual ambiguity about the Fed’s intent, warning that the fight against inflation will cause economic “pain”
- US CPI shows its first decline in months — falling from 9.1 percent in June to 8.5 percent in July and 8.3 percent in August — providing tentative evidence that inflation may have peaked, though the readings remain far above target and the Fed makes clear that any pause is premature
- Boris Johnson resigns as UK Prime Minister on July 7; Liz Truss takes office on September 6 and within three weeks announces an unfunded package of tax cuts that triggers a UK gilt market crisis, sends sterling to near-parity with the US dollar, and forces an emergency Bank of England intervention — the most dramatic developed-market bond market episode since the European sovereign debt crisis
- Queen Elizabeth II dies on September 8 at Balmoral Castle at the age of 96, ending a reign of 70 years; King Charles III accedes to the throne and the Commonwealth, of which Jamaica is a member, enters a period of mourning
- The US dollar reaches its strongest level in twenty years, with the DXY index crossing 114 in late September; the dollar’s strength is both a function of the Fed’s aggressive tightening and a flight-to-safety dynamic that compresses every other major currency against the reserve currency
- Jamaica’s summer 2022 tourism peak season delivers its strongest July-August performance since before the pandemic, with full-year 2022 arrivals now on course to approach or match 2019’s record; the tourism recovery that the pandemic threatened has, in the peak measure, substantially completed
It is August 26, 2022. Jerome Powell is at Jackson Hole, Wyoming, and he is delivering the shortest and most consequential speech the Federal Reserve chair has given at this venue in decades. Eight minutes. No equivocation. “We must keep at it until the job is done.” The markets understand the signal before he leaves the podium: the September hike will be 75 basis points, the rate cycle is not pausing, and anyone who had been hoping for a pivot is reading the speech wrong. In London, Boris Johnson is packing his things at Downing Street; Liz Truss is preparing a budget that will, within weeks, produce the most disorderly UK gilt market episode in living memory. In Montego Bay, the hotel corridors are full in the way they have not been full since 2019. July and August have delivered. The summer peak has held against every external headwind the second half of 2022 was supposed to bring. The question now is whether an autumn of pain — Powell’s word — is the price that must be paid to preserve the recovery’s foundations, or the event that finally breaks them.
Jackson Hole: “Pain” as Policy
Jerome Powell’s appearance at the Jackson Hole Economic Symposium on August 26 has, in the context of the institution’s communication history, a specific character: it was the speech that told the truth about what was coming in the plainest language a Fed chair had used in the modern era of central bank communication. Powell did not hedge. He did not offer comfort. He said, explicitly, that restoring price stability “will require maintaining a restrictive policy stance for some time” and that the process “will bring some pain to households and businesses.” He invoked Paul Volcker’s 1980s inflation fight — the rate cycle that caused the deepest US recession since the Great Depression and the one that successfully broke the inflation expectations that the 1970s oil shocks had embedded. The implication was deliberate: the Fed was prepared to go as far as the task required, and the task was not finished.
The September 21 FOMC meeting delivered the third consecutive 75 basis point increase, taking the federal funds rate to a target range of 3.00–3.25 percent — 300 basis points higher than at the start of the year, the fastest tightening over a comparable period since the early 1980s. The September dot plot revised the endpoint higher again: the median FOMC participant now projected the federal funds rate reaching 4.4 percent by end-2022 and 4.6 percent in 2023, implying further significant increases at the November and December meetings. The terminal rate — the level at which the Fed would pause — had been marked up three times in three quarters. Each revision reflected new information about the persistence of inflation that the prior projection had not captured. The dot plot was becoming a ledger of the Fed’s updating understanding of how wrong it had been in 2021.
For Jamaica, the “pain” that Powell described abstractly was arriving in concrete form through multiple channels. The US dollar’s twenty-year high was not merely a financial market statistic: it was the currency in which Jamaica’s debt service obligations, its energy imports, its hotel revenues and its remittance inflows were denominated, creating a set of effects that were simultaneously contractionary and expansionary in ways that required careful disaggregation. Jamaica’s export revenues — tourism in particular — were priced in US dollars, which meant that the dollar’s strength improved the Jamaica dollar value of those receipts. Jamaica’s import costs — petroleum, wheat, capital equipment — were also dollar-denominated, which meant the same strong dollar was making the island’s import bill more expensive in local currency terms. The BOJ’s management of the JMD rate in this environment was one of the more technically demanding exercises in the reform period’s history.
The First Inflation Reading That Didn’t Rise
The US Bureau of Labor Statistics’ July CPI release, published in August, provided the first genuinely encouraging data point in the inflation story that had been uniformly discouraging since the spring of 2021: the headline rate fell from 9.1 percent in June to 8.5 percent in July, driven primarily by the decline in energy prices as petroleum futures had retreated from their March peaks. The August reading, released in September, came in at 8.3 percent — lower than June’s peak but higher than consensus forecasts had predicted, with core inflation (excluding food and energy) accelerating to 6.3 percent and suggesting that the inflationary impulse was spreading from commodities into services and shelter in ways that energy price declines would not resolve. The Federal Reserve made clear at its September meeting that the improvement in headline inflation was insufficient to change the calculus: core inflation’s trajectory was what mattered, and it was moving in the wrong direction.
The inflation peak question — whether June 2022’s 9.1 percent would prove to be the cycle’s high — had material consequences for Jamaica’s planning horizon. If US inflation was genuinely turning, the case for a Fed pause — and the beginning of an eventual easing cycle — could be constructed in 2023 terms rather than 2024 or later. That would have implications for sovereign borrowing costs, for the JMD exchange rate, and for the real income trajectory of the Jamaican diaspora in the United States whose remittance capacity was being compressed by 9 percent consumer price increases. Every tenth of a percent that US inflation declined was a tenth of a percent less erosion of the real purchasing power of the hospitality worker in Miami or the construction worker in New Jersey who was wiring money to family in Kingston or Montego Bay. The turn in the headline number mattered even as the core print counselled caution about declaring victory.
The UK’s Self-Inflicted Crisis
The sequence of events that produced Q3 2022’s most dramatic developed-market financial episode began with Boris Johnson’s resignation on July 7 — a resignation that had been coming for months as the cumulative weight of the Partygate scandal, the Covid rule violations and the political damage from a series of senior cabinet resignations produced an intraparty revolt that could not be managed through the usual tools of British political survival. Liz Truss won the subsequent Conservative leadership contest and took office on September 6. Her tenure would prove the shortest of any British Prime Minister since the series began tracking global events.
On September 23, Chancellor of the Exchequer Kwasi Kwarteng presented a “mini-budget” that was, in its ambitions and its consequences, neither mini nor a conventional budget. The package included the largest package of unfunded tax cuts in British fiscal history — estimated at £45 billion over five years — at a moment when the Bank of England was raising interest rates to combat double-digit inflation and the UK gilt market was pricing sovereign borrowing costs in the context of a significant current account deficit and a currency that had already been under pressure for months. The bond market’s reaction was immediate and severe: 10-year gilt yields rose from approximately 3.5 percent before the announcement to nearly 4.5 percent within days, and the pound fell to its lowest level against the US dollar in recorded history, briefly touching $1.03. The Bank of England, which had been raising interest rates to tighten financial conditions, was forced to intervene in the gilt market as a buyer — simultaneously loosening monetary conditions — to prevent the collapse of liability-driven investment strategies that threatened UK pension funds.
For Jamaica, the UK’s fiscal crisis had significance beyond its spectacle. The United Kingdom is Jamaica’s second-largest tourist source market and the primary destination of one of the island’s most significant diaspora communities. A UK in economic and political crisis — sterling at near-parity with the dollar, real incomes under pressure from double-digit inflation that the gilt crisis was about to make more expensive to service, and political leadership in turmoil — was a UK whose citizens had less disposable income for overseas holidays and whose diaspora members had remittance capacity denominated in a weakening currency. The sterling implications of the gilt crisis were not an abstraction for the Jamaican community in London, Birmingham and Manchester. They were a direct reduction in the Jamaica dollar value of every pound sent home.
The Summer Peak: The Recovery Completes
Against the backdrop of the Fed’s “pain” warnings, the UK’s gilt crisis and a dollar that was crushing every other currency it touched, Jamaica’s summer 2022 peak season delivered the data point the recovery had been building toward since October 2020: July and August visitor arrivals that were, in the key resort corridor segments, essentially at 2019 levels. The Jamaica Tourist Board’s Q3 data showed that the full-year arrival trajectory had, by September, placed 2022 on course to match or exceed 2019’s record of approximately 2.68 million stopover visitors. The hotels were running the occupancy rates and average daily rates of a fully recovered market. The revenue per available room figures in the major resort corridors — Montego Bay, Negril, Ocho Rios — were, in nominal terms, above anything the pre-pandemic data had recorded.
The resilience of Jamaica’s summer 2022 season in the context of the external pressures that Q2 and Q3 had assembled — inflation eroding US consumer purchasing power, bear markets in equities and crypto, the dollar’s strength raising the cost of international travel — confirmed something about the character of Jamaica’s tourism recovery that the series had been tracking since the first Resilience Corridor bookings came in ahead of expectations in late 2020. The Jamaican holiday had become, for a meaningful segment of the American leisure travel market, a committed annual expenditure rather than a discretionary one. The consumer who had kept their Jamaica booking through Delta, through Omicron, through the steepest inflation in forty years was not making the decision anew each year; they were executing a standing preference whose cost elasticity was lower than the macro environment had suggested it might be.
The Bank of Jamaica’s monetary policy decisions through Q3 continued the tightening that the inflation environment demanded. Policy rate increases at multiple MPC meetings brought the BOJ’s rate to levels that were beginning to produce visible effects in the mortgage market — NHT rates adjusting, commercial lending spreads widening, the monthly payment on a typical residential purchase rising in a way that was legible to borrowers in their qualification conversations. The currency, managed through intervention and reserve deployment, held within a range that the BOJ’s framework was designed to maintain. The quarter ended with Jamaica’s macroeconomic management credibility intact — an outcome that was not guaranteed entering a period of global financial stress of this magnitude and speed.
What This Means
Homeowners close Q3 2022 in a property market where the rate cycle’s effects are now fully visible in the cost of new financing. The NHT and commercial mortgage rates that prevailed in 2021 — the rates at which the recovery’s demand surge was underwritten — are gone. The rates available in Q3 2022 reflect the BOJ’s tightening and the global rate environment that has repriced every dollar-linked borrowing cost upward. For existing homeowners with fixed mortgages, the rate cycle has had no effect on their monthly obligation and a net positive effect on their asset value — reduced new supply at higher construction costs in a market with sustained demand supports prices for existing stock. For those who locked in pre-tightening rates on variable-rate instruments, the Q3 experience may be the first quarter in which rate resets are visibly compressing household budgets. The advice that Q1’s analysis offered — move before the cycle advances further — was correct, and the window it described has now substantially closed.
Renters in Jamaica’s tourism parishes close Q3 2022 having worked the strongest summer since 2019. The employment data for the peak season — July and August — reflects full staffing at hotels and resorts whose occupancy was running at or near pre-pandemic levels, which means full hours, full tips, full supplementary income for workers across the hospitality supply chain. The cost of living remains elevated: the inflation that was compressing real wages in Q1 and Q2 has not materially abated, and the BOJ’s rate cycle has made any credit-financed consumption more expensive. The net position for tourism sector workers entering the autumn booking period — before the winter season’s demand arrives — is one of nominal wage recovery, real wage pressure, and a housing market in which the rental stock available at affordable rates has not expanded proportionally to the workforce’s recovery. The structural housing shortage that the series has tracked since before the pandemic is asserting itself more visibly as incomes recover but supply does not.
Developers reading Q3 2022 are navigating the specific arithmetic of a market in which the demand case is confirmed — the summer’s data makes that argument — but every cost input has moved against the pro forma assumptions of twelve months ago. Construction financing is more expensive. Material costs, while beginning to moderate from the most extreme supply chain-driven peaks, remain elevated relative to pre-pandemic baselines. Labour competes with the fully-employed hospitality sector for the same skilled workforce. The buyer pool — workers whose employment income has recovered but whose mortgage qualification has been compressed by rate increases — can absorb less debt than the same buyer could have absorbed in 2021. The project that delivers in 2024 or 2025, when the rate cycle may have turned and buyer qualification capacity recovered, may underwrite successfully at today’s costs. The discipline required is holding the investment thesis through the rate cycle’s peak without abandoning the arithmetic that makes it viable on the other side.
Businesses across Jamaica close Q3 2022 with their strongest revenue quarter since the pandemic began. The summer peak delivered. For the tourism and hospitality operators who have spent the last two years rebuilding occupancy, rate and margin, Q3 2022 is the confirmation that the thesis was correct. The businesses that will find the confirmation most meaningful — and most useful for the planning conversations now beginning about 2023 — are those that can distinguish between the structural demand recovery that the data is confirming and the cyclical tailwind from pent-up post-pandemic travel enthusiasm that the same data contains. The former is the basis for capacity investment and workforce development. The latter is the basis for caution: if any portion of the summer’s demand reflects the final drawdown of the accumulated travel deficit from 2020 and 2021, the 2023 and 2024 baseline may be somewhat below this summer’s performance even in a continued recovery environment.
Diaspora Jamaicans in the United Kingdom are closing Q3 2022 in a more difficult position than at any point since the pandemic’s acute phase. Sterling’s fall to near-parity with the US dollar — and to its weakest level against the Jamaican dollar in years — has materially reduced the value of remittances sent from the UK in pound terms. The diaspora Jamaican in Birmingham whose family commitments have not changed is sending the same number of pounds and receiving materially fewer Jamaican dollars. The gilt crisis and the political instability surrounding the Truss government add uncertainty about the trajectory of UK inflation, UK interest rates and UK economic growth that will determine whether sterling recovers any of the ground it lost in Q3. US diaspora Jamaicans are in a stronger position: the dollar’s twenty-year high means that a given dollar remittance is worth more in Jamaican dollar terms than at any recent point, partially offsetting the inflation erosion of real US earnings that the year’s price environment has produced.
Outlook
Q4 2022 will be defined by two questions whose answers will determine the character of 2023’s economic environment for Jamaica. The first is whether the Federal Reserve’s rate cycle reaches its projected terminal rate — now approximately 4.4 to 4.6 percent — without breaking something significant in the US or global economy before inflation is durably controlled. The second is whether Jamaica’s winter booking season, which the forward data entering Q4 has been showing at encouraging levels, translates into the arrival volumes that would allow full-year 2022 to be confirmed as the recovery’s completion. If the winter season holds and the Fed’s tightening produces a soft landing rather than a hard one, Jamaica enters 2023 with the recovery substantially complete, the rate cycle approaching its terminal point, and the structural foundations intact. That is the optimistic scenario. The pessimistic one — a recession in the United States that cuts the source market’s travel spending capacity in the year the recovery most needed to be confirmed — is not what the data implies, but it is what Powell’s “pain” warning was preparing the market to consider.
The Liz Truss government’s gilt crisis will resolve in one of two ways that Q4 will clarify: fiscal retreat from the mini-budget’s unfunded tax cuts, or a UK government debt crisis that forces a more dramatic resolution. The former — which Truss herself ultimately executed before resigning — would stabilise UK gilt markets and provide some recovery to sterling, partially restoring the value of UK diaspora remittances. The latter would be a UK sovereign stress episode with implications that were genuinely novel in the post-2008 institutional order. Markets by September’s end were pricing the probability of the former as higher, and the Truss government’s internal politics were suggesting the same. The Bank of Jamaica’s management of the JMD through Q4 will need to account for both the Fed’s continued tightening and the possibility of sterling and gilt market stabilisation creating a somewhat less hostile external environment for the second half of the rate cycle.
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 2022: July–September 2022.
Follow Jamaica Homes on Youtube @jamaicahomes and Instagram @jamaica_homes and on Facebook @jamaicahomesnews Send us a message or email us at onlinefeedback@jamaica-homes.com or editor@jamaica-homes.com
Visit our YouTube Community ↗