Signs of US upswing, but don't exhale just yet

Dennis Morrison, Contributor

As the Jamaican authorities contemplate the economic programme that would form the basis of a new arrangement with the International Monetary Fund, the outlook for our major trading partners is a critical factor that will have to be taken into account.

In this regard, recent economic news out of the United States (US) has helped to create an air of optimism that the American economy may now be experiencing self-reinforcing growth. The extent to which a resurging US economy will translate into improved market conditions for Jamaica will become clearer in coming months.

Last week, the main stock market indices reached levels last seen in the first half of 2008. In the case of the Dow Jones Index, it temporarily crossed the 13,000-point mark for the first time since 2008. Rising stock markets have a positive wealth effect and a direct bearing on consumer confidence and spending. In the US, consumer spending accounts for more than two-thirds of economic activity.

Consumer confidence and spending are also heavily influenced by the job market, and here again the recent US news has been encouraging. The weekly figures for jobless claims (for unemployment benefits) in the US are now down to early 2008 levels, which means that the rate of job losses is returning to pre-recession levels. With job uncertainty abating, consumers are likely to be more willing to spend, and that means a boost for economic activity.

economic picture

The economic picture in the US has also been helped by the increased signs of progress in bringing Greece's debt crisis under control. Concerns over this and the financial and debt problems in Spain, Portugal, Italy, Ireland, etc, have weighed down global financial markets. The fear was that a meltdown in the region's financial system would spread to the US, given the interconnectedness of global markets and the fact that Europe is America's major export market.

While the conclusion of bailout arrangements for Greece and the general rescue fund for Eurozone countries should reduce uncertainty in the US, Europewide protest campaigns are being mounted. Trade unions in Greece are organising work stoppages against the harsh economic austerity measures demanded in return for new rescue loans and the write-down of Greek public debt by banks and private investors. There is a risk of widespread disruption.

A more recent threat to US growth momentum has arisen from the run-up in oil prices resulting from tensions in the Gulf region. More specifically, gasolene prices in the US have spiked in recent weeks but are not yet choking the pace of economy activity.

It is estimated, however, that should prices rise by another 15-20 per cent to reach US$4 per gallon, GDP growth could be reduced by nearly 0.5 per cent. Nonetheless, the outlook for the US economy is still favourable.

The immediate impact of improvements in America's economic prospects on Jamaica could be felt in tourism and remittances. Unfortunately, warm winter weather, especially in the vital US Northeast region - the biggest single source of tourists for the island - has so far been a damper on our traditional peak winter traffic. Our efforts will now have to be directed at garnering as much business as possible in the summer season.

recovery of remittances

The pace of recovery of remittances has slowed in recent months, but monthly inflows are now nearing pre-recession levels. With the unemployment rate in Florida - the location of the largest Jamaican population - being well above the national level, this could be a constraining factor on the short-term growth of remittances. The weak UK economy could also affect inflows from that country.

Beyond tourism and remittances, the lessening of the economic turbulence in the US and Europe (which is not firm and is not to be overstated) offers some scope for Jamaica to increase its exports in agro-products and services in the information communication technology sector. Flagship companies like Grace and Jamaica Producers, and other less-publicised players, can be catalysts for dynamic export growth, which is essential if the local economy is to pick up speed.

A big part of the effort to generate economic growth is dependent on the mobilisation of investment. Projects in the 'pipeline' relating to the micro, small and medium enterprise sector, tourism, infrastructure, particularly new electricity-generating plants, must be pushed out as a matter of national priority. Paul 'Mr Pipeline' Robertson was the butt of many jokes, but his efforts bore fruit in the spurt of investment in tourism that expanded construction activity and jobs in the sector.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.