Wild oscillations up north brings crude relief to Jamaica

Trading on major financial markets around the world continue to be marked by wild oscillations following the downgrade of United States' long-term debt.

Reactions to the downgrade by Standard & Poor's were reinforced by evidence that global economic recovery is faltering, and the on-going European financial crisis.

So great is the level of uncertainty that even the promise by the US Federal Reserve to keep short-term interest rates near to zero for the next two years, a gesture to spur investment and risk-taking, has not been enough to calm the markets.

While the downgrade of the US credit rating has exacerbated the uncertainty, at the root of the problem is an increasingly apparent lack of confidence about the future direction of the US and European economies.

With the shares of major European banks now plunging, and Italy and Spain being overtaken by the debt crisis, there are clear indications that the threats to the region's entire financial system are real.

In the weeks leading up to last Monday's deep sell-off on global stock markets earlier this week, investors had been concerned by weak US economic data and the confidence-sapping, debt-ceiling negotiations in Washington.

These factors reinforced sentiment that the risk of another recession had increased with the political leadership in Washington seen as too divided on the measures needed to reignite the economic recovery.

That risk has increased with the most recent events and particularly bearing in mind that together the US and the European Union represent over 50 per cent of world economy.

The threat of another recession is bad news, but especially for countries which are struggling to pull out of the downturn of 2008-2009.

It is even more worrying for those countries like Jamaica, whose trade and economic ties are almost entirely linked to US and European markets.

Major export industries and domestic sectors are still depressed and any hope of recovery would be set back by a second global recession. And those sectors that have withstood the pressures from the Great Recession, like tourism, would face an uphill task in case of another downturn.

Moreover, the effects of a return to recession could be more severe given that the European and US economies are already fragile and the political will to act quickly and decisively has waned.

Jamaican consumers and businesses will, in the immediate term at least, get some relief from high oil prices in the midst of the financial turmoil and threat of recession.

Oil prices which had jumped in July after a brief decline in June have dropped sharply in the past two weeks as traders are anticipating that with slow economic growth demand for oil will ease.

Already, JPSCo is projecting reduced energy costs on light bills, and gasolene prices have dropped reversing the run-up we had been experiencing at the gas pumps in recent weeks.

Since February, oil prices had escalated by more than US$20 per barrel to nearly US$100-120 per barrel due to political uncertainty in the Middle East and expectations of faster economic growth.

At one stage, they seemed set to return to the pre-recession highs of over US$130 per barrel, and in the past month gasolene billing prices in Jamaica had gone up by over J$5 per litre. This week, there were reductions of J$4.10 per litre for 87- and 90-octane gasolene and J$3.20 for diesel.

This situation will only last as long as the world economic outlook remains uncertain. And the reality is that in overall terms, savings in our energy bill are outweighed by the negative impact of a weak global economy on our tourism, bauxite and other sectors, as well as on remittance and investment inflows.

Meanwhile, Jamaican motorists should be aggressive in seeking out the stations selling at the lowest prices.

business@gleanerjm.com