Jamaica Economic Intelligence | Q3 2018 | July–September 2018
Key Findings
- The US-China trade war deepens in Q3 — tariffs on US$34 billion of Chinese goods take effect July 6; Trump threatens a further US$200 billion as the confrontation escalates beyond its original scope
- Turkey’s lira collapses approximately 40 percent against the dollar through 2018, with the most acute crisis days in August; emerging market currencies broadly sell off amid US rate pressure and trade uncertainty
- The Federal Reserve raises rates on September 26 — the third hike of 2018 — and removes the word “accommodative” from its policy statement, signalling confidence that normalisation is approaching completion
- The Bank of Jamaica cuts its benchmark interest rate — moving in the opposite direction from the Fed — as the reform period’s improvements give monetary policy the domestic flexibility that the pre-2013 era had denied
- Jamaica’s summer tourism season delivers another strong quarter; unemployment falls to approximately 9.3 percent — the first reading below ten percent in the island’s modern recorded history
- The hurricane season is active but passes without a direct major hit to Jamaica; the fifth consecutive tourism record remains on track for the year’s final confirmation
It is August 10, 2018. A tweet from the US President — announcing doubled tariffs on Turkish steel and aluminium — triggers one of the fastest single-currency collapses in modern financial history. The Turkish lira, already down more than 20 percent against the dollar for the year, loses another fifth of its value in a matter of hours. In Ankara, the central bank is paralyzed, caught between an economy screaming for rate hikes and a president who has publicly and repeatedly demanded lower rates as a matter of political faith. Across the globe’s emerging market currency floors, the sell orders are flowing: Argentine peso, South African rand, Indian rupee, Indonesian rupiah — every currency that the market has decided is too exposed to rising US rates, a strengthening dollar and a decelerating global trade environment. The phrase “emerging market contagion” is appearing in every research note, every Reuters flash, every risk desk’s morning update. And in Kingston, the Bank of Jamaica’s monetary policy committee is preparing to announce a cut to its benchmark interest rate. Jamaica is going the other way.
Turkey Burns: The Summer’s EM Contagion
The Turkish lira crisis had been building for months before August’s acute phase. Turkey had run persistent current account deficits, accumulated significant foreign-currency corporate debt, and operated under a central bank subject to increasingly explicit political interference from President Erdogan — who had publicly and repeatedly argued, against mainstream macroeconomic consensus, that raising interest rates caused inflation rather than containing it. By August 2018, with inflation running above 15 percent year-on-year, the lira had lost approximately 30 percent of its value against the dollar since January. When Trump announced on August 10 that he was doubling the tariff rates on Turkish steel and aluminium, the lira’s residual market confidence evaporated. The currency fell as much as 20 percent on August 10 alone, hitting historic lows against the dollar and the euro. Within days, the annual loss was approaching 40 percent.
The contagion effects were real but uneven. Argentina, which had already approached the International Monetary Fund in June 2018 for emergency support — a US$50 billion stand-by arrangement, the largest in IMF history at the time — was facing its own currency crisis through the quarter, with the peso falling sharply as investors questioned whether even the IMF support package would be sufficient to stabilise the external position. South Africa’s rand, India’s rupee and Brazil’s real all came under meaningful pressure as global investors reassessed their exposure to economies that shared Turkey’s vulnerabilities: current account deficits, foreign-currency debt, dependence on external financing in an environment of rising US rates and a strengthening dollar. The common thread in every case was the Fed: each rate hike tightened the screws on external-debt-heavy emerging economies by raising their servicing costs and strengthening the dollar against which their liabilities were denominated.
Jamaica, in Q3 2018, was conspicuously absent from the EM crisis narrative. This was not an accident. The reform programme of 2013–2017 had been specifically designed to eliminate the vulnerabilities that made EM contagion episodes dangerous for small open economies: the primary fiscal deficit, the excessive debt burden, the over-reliance on short-term external financing, the absence of adequate reserve cover. By 2018, Jamaica’s debt-to-GDP ratio had fallen to approximately 99 percent — approaching the psychologically significant 100 percent threshold for the first time in the modern era — and the external reserve position provided the kind of buffer that made a lira-style currency event structurally implausible. The J$ continued its orderly managed depreciation, the Bank of Jamaica intervened selectively to smooth volatility, and Jamaica’s sovereign bond spreads — to the extent they widened at all during the EM stress episode — compressed again within days. The island’s experience of the EM contagion was, in effect, that of a country that had done the work and was watching others pay for not doing it.
Trade War Deepens: The $200 Billion Escalation
The US-China trade war that had moved from announcement to implementation on July 6 — when 25 percent tariffs on the first US$34 billion tranche of Chinese goods took effect, with China’s retaliatory tariffs simultaneous — escalated further through the quarter. On August 23, the second US tariff tranche of US$16 billion took effect, bringing the total covered goods to US$50 billion. China matched it measure for measure. The administration’s response was not restraint but acceleration: on September 17, Trump announced 10 percent tariffs on a further US$200 billion in Chinese goods, to take effect September 24, with a provision that the rate would rise to 25 percent on January 1, 2019 if no deal was reached. The scale of the September action was qualitatively different from anything that had preceded it: US$200 billion represented nearly half of all US imports from China, and coverage at that level would begin to affect US consumer prices in ways that the earlier, more targeted actions had largely avoided.
China’s formal response to the September announcement was measured in tone but unequivocal in substance: it would impose additional tariffs of 5–10 percent on US$60 billion of US goods simultaneously. Negotiations, which had been attempted in May and June, were declared impossible under the circumstances — a US threat structure that China was characterising as coercive rather than reciprocal. The arithmetic of the confrontation was becoming clearer by September’s end: the United States had tariff coverage over more than US$250 billion of Chinese imports; China, whose US imports totalled only US$130 billion annually, had effectively exhausted its symmetrical tariff retaliation capacity and was moving toward non-tariff measures — regulatory impediments, investment restrictions, currency management — whose scope and implications were less transparent to financial markets.
The Fed Drops ‘Accommodative’: A Normalisation Milestone
The Federal Open Market Committee’s September 25–26 meeting delivered the quarter’s third 2018 rate hike, raising the federal funds rate target range to 2.0–2.25 percent — the highest level since April 2008 and the seventh increase in three years. The rate decision itself was unremarkable: it had been fully anticipated since the June meeting’s dot plot update. The significance of the September statement lay in a single word that was removed from it. The FOMC, which had described monetary policy as “accommodative” in every statement since the recovery began, dropped the adjective from September’s language — indicating that policy was now, in the Committee’s judgment, approaching the neutral rate that neither stimulated nor restrained the economy. The removal was subtle and technical; its implication was that the end of the normalisation cycle was in sight. One more hike — December’s — would bring the rate to 2.25–2.5 percent, the lower bound of most estimates of the long-run neutral rate. Whether to continue beyond that level was the question that would define 2019.
For Jamaica, the seventh Fed hike was absorbed with the same institutional composure that had characterised each of its predecessors. The Bank of Jamaica’s foreign exchange reserve cover remained comfortable above the standard adequacy benchmarks. Sovereign bond spreads showed no meaningful widening during the EM contagion episode or in the immediate aftermath of the September hike. The J$’s depreciation trajectory ran at its managed pace. And the BOJ itself — in the most consequential signal of Jamaica’s changed monetary policy circumstances — had moved in August to cut its own benchmark interest rate, going in the opposite direction from the Fed, the Bank of England and every other major central bank in the tightening cycle. The institutional confidence that this represented would have been unimaginable in the Jamaica of 2013.
Jamaica’s Rate Cut: The Reform’s Unexpected Dividend
The Bank of Jamaica’s decision to reduce its benchmark policy rate in August 2018 — bringing it from 2.0 percent to 1.75 percent — was, in the context of the global monetary environment of the time, a genuinely unusual act. Every major central bank was in or approaching tightening mode: the Fed had delivered three 2018 hikes; the Bank of England had raised rates in August for the first time in a decade; the European Central Bank was tapering its asset purchases. For a small open economy to cut its own benchmark rate in this environment was the kind of thing that, five years earlier, would have been interpreted by markets as a signal of economic distress and triggered the capital outflows that had characterised Jamaica’s pre-reform vulnerabilities. In August 2018, the market response was entirely different. Sovereign bond spreads did not widen. The J$ did not come under speculative pressure. The BOJ’s cut was received as a credible domestic monetary policy decision, not a crisis signal.
The substance of the cut reflected the BOJ’s assessment that Jamaica’s domestic economic conditions — inflation anchored within its target range, credit growth accelerating but not overheating, the labour market tightening at a pace that reflected genuine demand rather than monetary excess — warranted further easing to support the growth acceleration that the reform period’s stabilisation had made possible. The structural improvements in Jamaica’s fiscal position and external resilience had created, for the first time in a generation, the conditions under which domestic monetary policy could respond to the domestic economy rather than being held hostage to the external environment. The BOJ’s capacity to cut when the rest of the world was hiking was not a sign of Jamaica’s weakness. It was the clearest possible demonstration of its strength — the strength that five years of reform had built precisely to enable this kind of policy independence.
Below Ten Percent: A Generation’s Work Confirmed
The Statistical Institute of Jamaica’s July 2018 labour force survey — released in Q3 — produced a data point that few observers would have considered achievable when the IMF programme was signed in 2013: Jamaica’s unemployment rate had fallen to approximately 9.3 percent. For the first time in the island’s modern recorded economic history, unemployment was in single digits. The decline from 16.9 percent in 2013 to 9.3 percent in 2018 represented, in human terms, the employment of several hundred thousand Jamaicans who had been out of work when the reform began. The tourism sector, the business process outsourcing industry, the construction pipeline and the agricultural recovery had all contributed. Private-sector employment was doing the work that the reform’s design had assigned to it — creating jobs through real demand rather than through the fiscal expansion that Jamaica’s pre-reform position had made unsustainable.
The summer tourism season, which ran through July and August, delivered another strong quarter — stopover arrivals continued to track ahead of the comparable 2017 period. Hotel occupancy rates on the north coast were sustained at the high-season levels that had come to characterise Jamaica’s peak periods, and the growing pipeline of all-inclusive capacity additions was being absorbed by the demand the island was generating. The Caribbean competitive landscape, now two years after Irma and Maria’s devastation, remained favourable: Puerto Rico’s rebuild was progressing but visitor confidence and hotel room inventory were not yet back to pre-storm levels. The Jamaica Tourist Board’s preliminary year-to-date estimates, updated through the quarter, showed the fifth consecutive record well within reach as the island moved into Q4’s traditionally strong winter booking period.
What This Means
Homeowners close Q3 2018 in the strongest property market Jamaica has seen since before the 2007–2008 financial crisis — and in several respects, stronger than anything the modern era has produced. Unemployment below 10 percent. GDP growth sustained. The BOJ cutting rates as the global environment tightens. Mortgage markets accessible at terms that reflect Jamaica’s improved credit standing. The property market is not running on sentiment or speculation. It is running on the fundamental transformation of an economy that has, over five years, removed the structural obstacles to sustained residential demand. For those who have been waiting for the moment when Jamaica’s property case becomes undeniable: the single-digit unemployment figure just made it.
Renters are living in the most favourable labour market environment since before the global financial crisis — and the most favourable since at least the early 2000s by the unemployment metric. Single-digit unemployment means the employed are no longer grateful merely to have jobs; they have options, and options produce bargaining power. Wages in the tourism, BPO and construction sectors are moving in ways that lower-income workers have not experienced in a generation. The structural problem of housing supply remains. But an economy with unemployment at 9.3 percent and falling is generating the household income base that makes solving the housing problem commercially viable rather than charity-dependent.
Developers are processing Q3 2018 with one number dominating the analysis: 9.3 percent unemployment. Everything else — the tourism record on track, the BOJ cutting rates, the Caribbean competitive advantage maintained, the government’s regulatory simplification programme continuing — are supporting arguments for the same core thesis. An economy where single-digit unemployment is becoming the new normal is an economy where the buyer pool for residential property is expanding at the base rather than just at the luxury end. The affordable housing demand story, which was theoretical in 2015, is real in 2018. The pipeline serving it is not yet adequate. That is a developer’s definition of opportunity.
Businesses across Jamaica enter Q4 2018 with a domestic environment that is comprehensively positive — and with the striking advantage, in Q3’s global context, of being an emerging economy that absorbed an EM contagion episode without becoming one of the contagion’s participants. Turkey, Argentina, South Africa: the failures are all economies that share vulnerabilities Jamaica has spent five years removing. The contrast is not abstract; it is visible in the credit rating, in the sovereign spread, in the BOJ’s ability to cut rates while others cannot. The business confidence this produces is the kind that translates into capital allocation decisions.
Diaspora Jamaicans monitoring Q3 2018 from North America and the United Kingdom have watched an EM contagion episode in which Jamaica was conspicuously not a protagonist. For those with memories of the 2008–2009 period, when Jamaica’s economy contracted and the IMF was an urgent necessity rather than a graduating success story, the contrast is vivid. For those who have been building investment positions in Jamaica through the reform years, the below-10-percent unemployment figure is the data point they have been waiting for. It means the domestic economy is generating demand that is real, sustained and growing — not a function of post-hurricane windfalls or temporary external tailwinds but of a labour market that has genuinely tightened.
Outlook
Q4 2018 will deliver the Fed’s final hike of the year — December’s fourth, bringing the target range to 2.25–2.5 percent. The removal of “accommodative” from the September statement means the Committee is approaching the end of what it has defined as the normalisation phase; what comes next — whether rates continue rising into genuinely restrictive territory, pause at neutral, or begin to fall as the TCJA stimulus fades — is the central uncertainty of 2019’s monetary policy environment. For Jamaica, December’s hike will be the eighth absorbed since 2015. Eight without incident is a complete data series. It is also the end of the test that the reform period was designed to pass.
The annual review, due in January 2019, will assess a 2018 that looks, in its macroeconomic headline data, like the year the reform period’s structural transformation became visible in the lived reality of Jamaican economic life: single-digit unemployment for the first time in living memory, a fifth consecutive tourism record, a central bank cutting rates while the world hiked, a debt-to-GDP ratio crossing the symbolically important 100 percent threshold, and an economy that weathered an EM contagion episode without becoming contagion. The question that 2019 will need to answer is whether this transformation produces the 3–4 percent GDP growth that Jamaica’s development aspirations require — or whether the island, having achieved stability, is still searching for the acceleration that stabilisation was only ever supposed to enable.
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 2018: July–September 2018.
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