Publication date: 5 January 2004 | Covering: October – December 2003
Quarterly Briefing
- Fed holds at 1%: No rate change; “considerable period” language; accommodative stance maintained; housing boom in full swing
- US Q3 GDP 8.2%: Revised estimate; strongest quarterly growth since 1984; tax cuts and consumer spending driving recovery; jobless recovery concerns easing
- Saddam Hussein captured: December 13 (FRESH 23 days); found in spider hole near Tikrit; US military operation; significant psychological moment for Iraq war
- Euro record: Hits US$1.2630 in December; dollar weakening on current account deficit and fiscal expansion; European exports squeezed
- China commodity demand: Commodity supercycle building; Chinese infrastructure boom driving copper, steel, coal prices higher globally
- US housing: Record existing home sales in 2003; prices up 7% nationally; mortgage rates at 45-year lows; boom accelerating
- Medicare reform: November; Bush signs Medicare Prescription Drug benefit; largest expansion of Medicare since 1965; US$395bn cost estimate
- Jamaica: Gradual recovery; NHT active; BOJ managing rates; commercial mortgage demand constrained by high rates
US GDP 8.2%; Saddam Captured; Dollar Falls
The fourth quarter of 2003 brought confirmation that the US economic recovery was gaining significant momentum. The revised third-quarter GDP growth rate of 8.2% — the strongest quarterly performance since 1984 — reflected the cumulative impact of the Bush administration’s tax cuts (which had delivered approximately US$350 billion of fiscal stimulus in 2003 alone), the Federal Reserve’s emergency-low 1% interest rates, and the natural cyclical recovery from the 2001 recession. Consumer spending, residential investment, and business equipment expenditure all contributed strongly. The labour market remained a concern — the “jobless recovery” had seen GDP grow substantially without commensurate job creation — but payrolls were beginning to recover. On 13 December, US forces captured Saddam Hussein in a spider hole near Tikrit, his hometown. The former Iraqi president, who had gone into hiding after the fall of Baghdad in April, was found dishevelled and without resistance. The capture was a significant psychological and political moment for the Bush administration and for the broader international community, though the Iraqi insurgency continued unabated. The US dollar continued to weaken through the fourth quarter against major currencies: the euro reached a record US$1.2630 in December, driven by the widening US current account deficit — which was approaching 5% of GDP — and the expansionary fiscal stance that raised concerns about long-term dollar sustainability.
China Commodity Demand; Housing at Record; Fed Holds
The commodity supercycle that would define the mid-2000s global economy was becoming evident in the fourth quarter of 2003, as China’s extraordinary infrastructure and industrial expansion began driving global prices for copper, steel, coal, alumina, and other raw materials sharply higher. Jamaica’s bauxite and alumina sector would benefit from this demand surge in subsequent years, improving the island’s export earnings. The US housing market closed 2003 with record existing home sales and house price appreciation of approximately 7% nationally, with many coastal and sunbelt markets recording significantly higher gains. The Federal Reserve kept rates at 1%, maintaining the most accommodative monetary stance in decades, and the FOMC’s statement continued to use “considerable period” language indicating no near-term rate changes. Mortgage rates at 45-year lows were the fuel; rising prices and the cultural belief in real estate as a one-way investment were the accelerant.
Jamaica: Gradual Recovery; Mortgage Conditions
Jamaica’s economic recovery from the 1990s financial crisis — which had required a costly government bailout of the banking sector and left a heavy legacy of public debt — was proceeding gradually. The high domestic interest rate environment that had characterised Jamaica since the financial crisis was beginning to ease somewhat, but commercial mortgage rates remained well above levels that would make market-rate finance accessible to most Jamaican households. The NHT’s subsidised lending — at 0%, 2%, and 4% on loans up to J$6.5 million individually or J$13 million for two-applicant borrowings — continued to be the primary vehicle for affordable homeownership. The Bank of Jamaica was managing monetary policy to maintain exchange rate stability and control inflation in a challenging external environment of high oil prices and dollar weakness.
Looking Ahead to Q1 2004
With US GDP growing at over 8% and the housing boom in full swing, the question for 2004 is whether the Fed will begin withdrawing its extraordinary accommodation. Markets expect the first rate hike in the second half of 2004. The Saddam capture removes one political uncertainty, but the Iraqi insurgency’s continuation ensures Iraq will remain a dominant policy concern. For Jamaica, the tourism season and oil prices will be the key variables.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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