Mark Ricketts | The economy caught some breaks in 2018
The world economy might be going to hell in a hand basket, but a favourable interpretation of Jamaica's economy could easily instill arrogance in some people. To these patriotic and observant Jamaicans, what is clear is that countries can't stand up economically to America, but not us. We not only can go toe to toe with the behemoth of the north, but we are less faint-hearted and even more resilient than many of our competitors.
Most countries' currencies have faltered badly against the US's and continue to do so even at this moment. Our currency, after showing a spot of weakness, has rallied valiantly against its US counterpart.
Stock markets all over the world, including in China, Australia, and New Zealand, have been wandering in negative territory for quite a few months. Ours, however, like the River Jordan, just keep rolling along. Even the US, having postponed its Santa Claus stock-market rally from the day before Christmas to the day after Christmas, when it gained over 1,000 points, has lost 4,000 points from its peak in October, while our market has continued to trend upwards.
Or what of interest rates? Several countries, including Canada, Turkey, and Argentina, have raised interest rates to be in lockstep with the US Federal Reserve, which raised rates last Wednesday, the fourth time this year. Countries move in tandem with the US to prevent foreign-exchange outflows chasing higher US-dollar returns. This could result in downward pressure on their currency. Not Jamaica; we have been lowering rates, hoping to spur investment. Interestingly, since 2016, the US has raised rates nine times, the exact number of times we have lowered ours.
Our inflation rate has been falling, even below International Monetary Fund (IMF) forecast. Surprisingly, this got us into big trouble with the Fund; that's strange, isn't it? Imagine we performed better than expected and got publicly chided. With a low inflation rate, and adequate reserves of foreign exchange, and a reasonably functioning floating-rate regime (B-FXITT), the current emphasis on the Consumer Price Index (CPI), as against the exchange rate, has some value under current conditions.
I emphasise current conditions because what a difference a year makes! No, what a difference three months make. At the start of 2018, the forecast for the world economy was bullish with the US leading the way. It was expected to enjoy benefits arising from major tax cuts, projected strong corporate earnings, and impressive gains in new employment.
Europe and the traditionally strong Asian economies were forecast to record robust growth. Emerging markets, such as China, India, and some Latin American and Middle Eastern countries, as well as developing countries, benefittting from sharp increases in commodity prices, gave credence to the optimism expressed at the start of the year.
With the global strength of the macroeconomic fundamentals, it was presumed that stock markets the world over would sizzle. This view held strong in the US until September, that is three months ago, when the stock market flirted with 27,000.
The underlying buoyancy of the stock market, and the continued belief in global economic growth fuelling strong demand, had commodity gurus predicting US$100 a barrel for oil in short order.
The year is closing out, and the actual numbers have meant that optimism has surrendered to doubt and that 2019 is shrouded in concerns rather than the uplift expected from 2018. The language now is either the dreaded 'r' word, recession, or the more palatable phrase, an 'expected slowing down'.
Jamaica got a huge break three months ago when the experts were wrong and oil, which was in the US$60s, instead of climbing further - as indicated by October 3 US crude oil active futures at US$76.41 - reversed course, settling at its lowest price, US$44 a barrel, on Christmas Eve. Had oil settled at US$100, with its massive flow-through impact in our oil import-dependent economy, our hope of supplanting exchange-rate skittishness with the CPI would have come to naught.
Low oil prices could mean slowing the pace of our depressing visible trade deficit, which, for the first nine months of this year, was US$3.2 billion. Another benefit: It has made the job of the IMF, the finance minister, the Bank of Jamaica governor, and the Economic Programme Oversight Committee's chairman, Keith Duncan, much easier as they all try to get the society to place greater emphasis on the CPI, thereby deflecting an ingrained preoccupation with the exchange rate.
Another huge break came a week ago when the US administration publicly declared its intention to lift sanctions next month on Russia's United Company (UC) Rusal. If that goes through, it will be a major boost for Jamaica and the West Indies Alumina Company (Windalco).
The US had placed bans on Russian oligarch Oleg Deripaska and his companies, including UC Rusal, but with Deripaska agreeing to reduce and restructure his stake in this company, the US responded positively with its latest initiative.
Earlier in the year, when the sanctions were first imposed, the London Metal Exchange suspended trading immediately and there were serious misgivings about employment and production at the plant in Jamaica. However, Prime Minister Andrew Holness capped important initiatives that took place between the Ministry of Foreign Affairs and the US government when he spoke to the US treasury secretary and got an agreement for a temporary waiver.
If sanctions are lifted, that would be a boon to the mining sector. There is still uncertainty, however, since Congress has to agree to it by February. Even then, the sector is not fully out of the woods due to collateral damage stemming from trade wars and conflict between the US and China.
The continued strength of the business process outsourcing sector, which is a boon for many entry-level job applicants, and the record-breaking earnings performance of the tourism sector are the kinds of breaks we definitely need, although there is a little concern that the latest quarterly reported data on tourism arrivals showed some modest decline.
Let's hope that this is a one-off situation and not the start of a trend, especially in light of the current talk of a possible global slowdown as we are approaching the end of a business cycle. Also, in some advanced countries, there is the shrinking of vast portfolios of treasury and mortgage bonds after nearly a decade of quantitative easing (QE). (QE is an expansionary monetary policy designed to stimulate the economy and increase liquidity).
For 2019, Jamaica's hope has to be low oil prices, an easing of trade conflicts, and Congress agreeing to the lifting of sanctions.