Tue | Mar 26, 2019

Editorial | America's cold and Jamaica's sneeze

Published:Wednesday | December 26, 2018 | 12:00 AM

The United States economy is gradually drifting from uncertainty to creeping fear. On December 21, the major US stock market indices fell sharply, with the Dow Industrial Average recording its largest weekly percentage decline in a decade. The market appears to be indicating growing doubts about future corporate earnings.

After years of steady growth under both the Obama and Trump administrations, investors are fleeing US stocks as the evidence of a slowdown in the US, Chinese and European economies during 2019 is becoming visible to discerning analysts. Stock markets generally are considered leading indicators of future economic performance.

Even as the US Federal Reserves Board (central bank) was raising interest rates during the week, to stave off a perceived future overheating of the economy, it was cutting its growth forecast for 2019 to 2.3%, from 2.5%. There is also little evidence of any upturn in inflation on the horizon despite the labour market being close to, what economists define as, full employment. Meanwhile, consumer sentiment remains very high. Apart from a pre-announced plan to raise interest rate, there was little that would immediately suggest a need for the recent increase.

 

Highly Uncertain

 

Stock market sentiments in the US appear to be spreading around the world, with most of the major global indices trending downwards during the last quarter. The situation for emerging markets remain highly uncertain and risky.

The markets are being spooked by a number of factors: the damaging and ongoing trade war launched by the US on China; the declining impact of the Trump tax cut, which pushed up the fiscal deficit without sparking a major revival in investment; evidence of a slowing global economy; and the growing dysfunctional nature of the US political process. There are other is, including Brexit.

The recent steep declines in global oil prices, along with forecasts of lower international trade, are both pointers to the global economy slowing noticeably in 2019.some economies may actually tip into recession during 2020.

Given the emerging global trends, it is most unfortunate that the US political process is seemingly inching towards a crisis. With the ongoing Mueller investigation into the 2016 US presidential election, the unsettled state of affairs in the White House, with a revolving door affecting senior US Cabinet positions, it is not likely that full focus will be directed at resolving the many economic problems on the agenda.

 

Political Difficulties

 

Current and imminent political difficulties in Washington could become a full-blown crisis with global implications.

The latest developments in the economies of the major countries is clearly not good news for small, highly indebted economies like Jamaica that depend on a healthy and growing global economy to prosper.

The Jamaican economy is highly reliant on the tourism industry, with well over 60% of visitors coming from North America. The negative "wealth effects" of a sharp and sustained downturn in the stock market will likely induce a fall-off in travel among the segment of the population invested in the market. If the economy actually drifts towards recession, and consumer sentiment falls, a more widespread downturn in travel could result.

Over the last decade, Jamaica's tourism industry has developed significantly measured by the number of rooms, and the quality and diversity of the product. Employment has also expanded sharply. Of note also is that dependence on earnings from the industry has increased sharply as the performance of other export sectors, including mining, disappoint.

Increasingly, the health of the Jamaican economy is dependent on the performance of the tourism sector. The emerging trends in the global economy should therefore draw the attention of the able managers and leaders of the sector. They will need to display their continued alertness and nimbleness.