Jamaica Economic Intelligence | Q2 2022 | April–June 2022
Key Findings
- The Federal Reserve raises its policy rate by 50 basis points in May — the largest single increase since 2000 — then by 75 basis points in June, the largest since 1994; the speed of the tightening cycle’s escalation exceeds what the March dot plot had implied
- US CPI reaches 8.6 percent in May and 9.1 percent in June — the highest reading since November 1981 — as energy and food prices driven by the Russia-Ukraine war compound the underlying inflation that the supply chain and demand story had already established
- The Terra/LUNA ecosystem collapses in May in one of the most spectacular single-event wealth destructions in financial history: TerraUSD’s algorithmic peg breaks, LUNA falls from approximately $80 to near zero in days, and an estimated $40 billion in market capitalisation evaporates, triggering a crypto contagion that sends Bitcoin below $20,000 by quarter-end
- China’s Zero-COVID lockdowns of Shanghai and other major cities through April and May add a new supply chain disruption to the global inflation story, constraining the manufacturing and export capacity of the world’s second-largest economy
- Jamaica’s summer 2022 tourism season opens with the strongest advance booking pace since 2019, but the compression of real US consumer purchasing power under 9 percent inflation raises the first credible question about whether demand durability has limits
- The Bank of Jamaica continues its most aggressive tightening cycle since the pre-reform era, raising its policy rate to levels that are beginning to move NHT and commercial mortgage rates in ways visible to borrowers
It is June 15, 2022. Jerome Powell is about to raise interest rates by 75 basis points — the largest single move the Federal Reserve has made since 1994 — and he is doing it because the CPI number that came in three days ago, 9.1 percent, made everything that had been discussed about gradual normalisation irrelevant. In lower Manhattan, the headquarters of Celsius Network are effectively inoperative; the crypto lender froze withdrawals three days before Powell’s decision and its assets are being consumed by the same margin calls that took Three Arrows Capital to the edge of insolvency. In Kingston, the Bank of Jamaica is doing its own arithmetic: the Fed’s rate path, the commodity shock, the weakening Jamaican dollar, the domestic inflation running well above target — all of it pointing in the same direction. The summer is beginning. The bookings are real. The tourists are arriving. And the cost of money, everywhere in the world at once, is going up faster than any model built two years ago had projected.
The Fed Accelerates: 50, Then 75
The Federal Reserve’s May 4 decision to raise its policy rate by 50 basis points — the first half-point increase since May 2000 — was, at the time it was made, the most aggressive single move of the tightening cycle. Chair Powell described it as appropriate given the inflation data and signalled that additional 50 basis point increases were likely at subsequent meetings; he explicitly ruled out 75 basis points as something the Committee was not actively considering. Six weeks later, that characterisation was obsolete. The June 10 CPI release — 8.6 percent headline, 6.0 percent core, energy and food driving the index to its highest reading since December 1981 — arrived on a Friday and altered the calculus before the following Wednesday’s FOMC meeting. What the Committee had not been actively considering became the decision it announced on June 15: a 75 basis point increase, the largest since November 1994, taking the federal funds rate to a target range of 1.50–1.75 percent.
The escalation from March’s 25 basis points to May’s 50 to June’s 75 captured something more significant than the individual moves: it captured the Federal Reserve’s recognition that its own prior characterisations of the inflation problem had been wrong and that the correction required urgency rather than deliberation. The institution that had spent most of 2021 describing inflation as transitory was now moving at a pace it had not moved at in nearly three decades. For financial markets, the repricing that had begun in Q1 accelerated: the S&P 500 entered bear market territory in mid-June, falling more than 20 percent from its January peak. The 2-year Treasury yield crossed 3 percent. The US mortgage rate, which had been below 3 percent as recently as the start of the year, moved above 6 percent — the fastest doubling of the 30-year fixed rate in the recorded history of the series. The US housing market, which had been among the most visible beneficiaries of pandemic-era monetary accommodation, began to show the first signs of demand contraction as the cost of financing a home purchase rose to levels not seen since 2008.
The Fed’s June dot plot revised its projected endpoint materially higher: the median FOMC participant now expected the federal funds rate to reach approximately 3.4 percent by end-2022 and 3.8 percent in 2023. Three months earlier, the same median had projected 1.9 percent by year-end. The revision was not incremental. It was an acknowledgement that the tightening cycle’s destination was significantly further than the institution had publicly projected as recently as the previous quarter, and that the speed of travel required to reach it was higher than anything the post-2008 normalisation experience had required. For Jamaica and every other small open economy linked to US dollar financial markets, the dot plot’s revision was not an academic exercise. It was the forward pricing of a global rate environment that the island’s sovereign debt, development financing and mortgage market would have to navigate.
Terra/LUNA and the Crypto Reckoning
The collapse of the Terra ecosystem in the second week of May 2022 was, in the speed and totality of its destruction, unlike any financial event in the previous decade. TerraUSD (UST) was an algorithmic stablecoin — a digital asset that maintained its dollar peg not through reserves of actual dollars or dollar-equivalent assets, but through a mechanism that linked it to a companion token called LUNA. When UST holders became net sellers, the mechanism required LUNA to be minted to absorb selling pressure, which diluted LUNA’s value, which produced more selling pressure on both assets, which produced more LUNA minting, in a spiral that had no floor below zero. LUNA traded at approximately $80 in late April. By May 12, it was worth fractions of a cent. TerraUSD, which had been designed to hold $1.00, traded below $0.10. Holders of UST and LUNA across the ecosystem — retail investors, yield farming protocols, venture funds that had written publicly enthusiastic endorsements of the project — collectively lost an estimated $40 billion in the span of days.
The Terra collapse was not merely an episode in the history of a particular token. It was the event that revealed the extent to which the broader crypto market had been held up by interconnected leverage and confidence rather than fundamental value at a moment when the Fed’s tightening cycle was simultaneously withdrawing the liquidity that had inflated every risk asset in the system. Bitcoin, which had reached approximately $69,000 in November 2021, was below $30,000 when UST broke its peg and below $20,000 by quarter-end. Ethereum fell proportionally. Celsius Network, a crypto lending platform that had marketed itself to retail depositors as an alternative to traditional savings accounts with yields of up to 18 percent, froze withdrawals on June 12 citing “extreme market conditions.” Three Arrows Capital, one of the largest crypto hedge funds, faced margin calls it could not meet and sought emergency financing that was not forthcoming. The quarter ended with the crypto ecosystem in a state of contagion that its most committed advocates had consistently argued was impossible — the stable coins were not stable, the yields were not sustainable, and the leverage that had made the bull market spectacular was making the unwinding catastrophic.
For Jamaica, the crypto collapse’s direct impact was limited but not absent. Jamaicans — particularly in the diaspora — had participated in the crypto bull market, and some portion of that participation was in assets that lost most or all of their value in May and June. The more material channel was indirect: the wealth destruction across global risk assets in Q2 2022 — crypto, equities, bonds all falling simultaneously in a manner historically unusual — contracted the net worth of the American consumer whose discretionary spending on leisure travel was the foundation of Jamaica’s tourism recovery. The tourist who had arrived in Q1 2022 with a stock portfolio and a crypto balance that had recovered from the pandemic lows arrived in Q3 2022 with both materially diminished. Whether that balance sheet contraction translated into travel behaviour change was the question the summer season was beginning to answer.
China’s Lockdowns and the Supply Chain’s Second Act
The assumption embedded in the Federal Reserve’s “transitory” characterisation — that global supply chains would normalise as pandemic disruptions faded — encountered a second act in Q2 2022 that neither the transitory framing nor its critics had fully anticipated. China’s Zero-COVID policy, which had suppressed outbreaks through 2021 with targeted lockdowns and mass testing, met the Omicron variant’s transmissibility in a manner the policy’s architects had not designed for. Shanghai — a city of 25 million and the world’s largest container port by volume — entered a lockdown in late March that extended through most of April and into May. Dozens of other Chinese manufacturing centres implemented partial or full restrictions. The factories that produced the electronics, appliances, auto components and consumer goods that the world’s retail supply chains depended on went quiet at exactly the moment when those chains had been expected to be recovering.
The Shanghai lockdown’s contribution to global inflation in Q2 was additive rather than transformative — the underlying inflation story was already well established — but it extended the timeline for supply chain normalisation and added pressure to shipping costs and component availability that were already elevated. For Jamaica’s import-dependent economy, the second supply chain disruption was another pass-through into retail prices for consumer goods that local producers could not substitute for. The inflation that the Russia-Ukraine commodity shock had made acute on food and fuel was compounded by sustained pressure on manufactured goods that Chinese lockdowns delayed the resolution of. The quarter ended with global supply chains further from normalisation than the consensus at the start of the year had projected.
Jamaica’s Summer Season: Real but Tested
The tourism data for Q2 2022 confirmed that the recovery was real and that Omicron’s rapid passage had not disrupted the trajectory: visitor arrivals in April, May and June ran materially ahead of the same months in 2021 and were approaching the comparable 2019 numbers in the strongest segments. The Jamaica Tourist Board‘s advance booking data for the summer season showed the highest forward occupancy levels since before the pandemic, and the hotel revenue data confirmed that the pricing power that Q1 had demonstrated was being maintained into Q2. For the first time since 2019, Jamaica’s tourism operators were managing demand rather than generating it — allocation decisions, rate optimisation, the revenue management posture of a market in which rooms were scarce rather than plentiful.
Against that positive picture, Q2 introduced the first credible challenge to the demand thesis that had been building since October 2020. The American consumer entering the summer of 2022 was not the consumer who had arrived in the winter of 2021 or spring of 2022. US CPI at 9.1 percent was eroding real purchasing power at the fastest rate in four decades. The US housing market, which had been a source of household balance sheet expansion through the pandemic period, was softening as mortgage rates doubled. The stock market had entered bear territory. The savings accumulated through 2020 and 2021 — the dry powder that had fuelled two years of pent-up travel spending — were being drawn down. The question was not whether Jamaica’s tourism product was desirable; the bookings confirmed it was. The question was whether an American consumer facing 9 percent inflation and a declining asset portfolio would maintain or reduce the share of disposable income allocated to international leisure travel. Q2’s data suggested the answer was maintain. Q3’s would test whether that held when the costs became fully visible.
The BOJ’s tightening cycle added a domestic dimension to the cost pressure question. The Bank of Jamaica raised its policy rate multiple times through Q2, reaching levels that were beginning to translate into mortgage rate adjustments from the National Housing Trust and commercial lenders. The Jamaica dollar, managed against a basket dominated by the US dollar, was experiencing depreciation pressure as global risk appetite contracted and the differential between Jamaican and US interest rates — historically one of the structural supports for JMD stability — was being compressed by the Fed’s aggressive tightening. The external financing cost for Jamaica’s sovereign debt rose with global rates. The quarter ended with Jamaica’s macroeconomic picture — strong tourism recovery, managed inflation response, stable institutions — in better shape than many peer emerging markets, but facing external headwinds of a severity the post-reform period had not previously encountered at this combination of speed and breadth.
What This Means
Homeowners enter Q3 2022 in a property market where the rate environment has shifted from a tailwind to a headwind in the span of two quarters. The BOJ’s tightening cycle has moved NHT and commercial mortgage rates to levels that are meaningfully higher than those that prevailed when the recovery thesis was being underwritten in 2021. For existing homeowners with fixed-rate mortgages, the rate move is irrelevant to their monthly obligation and favourable to their asset value — the housing stock they own is worth more in a market where new buyers face higher financing costs for new construction and resale. For prospective buyers who were qualifying at pre-tightening rate assumptions, Q2’s rate moves have reduced the loan amounts they can service and, for some, moved the monthly payment on their target home above what their income can support. The buyer pool is smaller than it was in Q1. It will be smaller again in Q3 if the BOJ’s cycle continues at its current pace.
Renters in Jamaica’s tourism parishes are navigating the specific tension of a quarter in which their employment income is at its strongest level since before the pandemic and their purchasing power is being simultaneously eroded by the fastest inflation the island has experienced in a generation. The hotels are full. The tips are real. The overtime hours are there for those willing to work them. And the price of the cooking gas cylinder, the flour bag, the cooking oil bottle, the electricity bill — all of it higher than a year ago by margins that hospitality wages, even at their recovered levels, are not fully absorbing. The labour market is tighter than it has been since before the pandemic. That tightness is beginning to produce nominal wage increases in the hospitality and service sectors. Whether those increases are keeping pace with the inflation that is eroding real wages is the distributional question that Q2’s strong headline tourism numbers obscure.
Developers are, in Q2 2022, operating in the most complex underwriting environment of the post-reform period. Every input to a development pro forma has moved unfavourably from the position it occupied twelve months ago: financing costs higher, construction material costs still elevated, labour costs rising with the tightening market, and the buyer pool’s qualification capacity reduced by the same rate cycle that has raised the developer’s own cost of capital. Against those headwinds, the demand case remains intact: Jamaica has a genuine housing shortage, the tourism recovery has produced an employed buyer class, and the prestige of homeownership in a recovering economy is undiminished. The projects that can be built at Q2 2022 costs and delivered at Q4 2023 prices — with the absorption assumptions underwritten against a buyer pool that may be somewhat smaller than today’s — are still viable. They require more conservative assumptions than the same projects required in 2021. Getting the arithmetic wrong in a rising-rate environment is more expensive than getting it wrong in a falling-rate one.
Businesses across Jamaica closed Q2 2022 with revenue numbers that, in most of the tourism and hospitality sector, were the strongest since 2019. They also closed it with cost structures — fuel, food, imported supplies, financing — that were the most expensive in years. The margin between those two realities is what Q2 2022’s business story is about. Hotels and restaurants that used the recovery’s demand surge to restore pricing — that raised rates and menu prices when the bookings confirmed they could — are sitting on margins that the commodity shock has compressed but not eliminated. Those that competed on price during the recovery period, that discounted to fill rooms when the competition was discounting, are finding the commodity shock’s cost pass-through more difficult. The businesses that will look back on Q2 2022 most clearly are those that had the pricing discipline to build the margin that the inflation environment is now testing.
Diaspora Jamaicans in the United States closed Q2 2022 having experienced, for the first time in the post-pandemic period, a quarter in which their own financial position deteriorated meaningfully. US equity portfolios in bear market territory, crypto holdings for those who participated in that market severely impaired, the purchasing power of incomes eroded by 9 percent headline inflation, and mortgage rates doubling for those who own property in rate-sensitive US housing markets — the diaspora’s balance sheet in June 2022 was materially weaker than it had been in December 2021. Remittance data through Q2 showed sustained flows to Jamaica, consistent with the historical pattern of diaspora communities maintaining home-country financial commitments through source-market stress. But the magnitude of the US consumer’s balance sheet deterioration in Q2 was larger than most prior stress episodes, and its persistence into Q3 and beyond will determine whether the structural resilience of remittance flows that the post-pandemic period had confirmed continues to hold.
Outlook
Q3 2022 will be the quarter in which the collision between Jamaica’s strongest tourism recovery since 2019 and the most aggressive global tightening cycle since the 1990s becomes fully legible in the data. The summer peak season — July and August — will deliver the visitor volumes and revenue figures that determine whether the full-year 2022 arrival total reaches, approaches or falls short of 2019’s record. The US consumer’s behaviour under 9 percent inflation and a bear market in equities will either confirm or challenge the thesis that leisure travel to Jamaica has become sufficiently normalised in the post-pandemic American spending pattern to be resilient against balance sheet pressure of this magnitude.
The Federal Reserve’s path to its projected end-of-year rate destination — approximately 3.4 percent by December — requires further significant increases through the July, September, November and December meetings. Whether the Fed’s tightening produces the soft landing that Chair Powell described as the Committee’s intent, or whether the speed and scale of the rate cycle breaks something in the US economy before inflation is durably controlled, is the question that will define not just Q3’s outlook but the shape of the global economy that Jamaica’s recovery must navigate through 2023 and beyond. The BOJ’s own path mirrors the Fed’s in its direction if not its scale: further tightening, at a pace calibrated to control domestic inflation without unnecessarily compressing the tourism recovery that is generating the employment and fiscal revenue the island depends on. That calibration — how tight is tight enough, and how much recovery can the rate cycle absorb without damaging the recovery itself — is the central monetary policy question of the second half of 2022.
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 2022: April–June 2022.
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