BOJ staff paper: Fewer jobs seen as cooling down inflation
Expect moderate inflation going forward due to low productivity and job losses, according to the staff working paper titled ‘Estimating Jamaica’s Potential Output’ from the Bank of Jamaica, BOJ.
Even as employment numbers improve relative to 2020’s high jobless numbers, it’s still going to take time to rev the economy to its potential in any given year, according to the author Hubert G. Scarlet, whose views do not necessarily reflect that of the central bank, the BOJ said in a disclaimer.
When there is lots of cash to spend it can cause the economy to overheat, in certain scenarios, leading to inflation. But the job losses arising from the economic impact of the COVID-19 pandemic has resulted in a large gap between the economy’s potential and actual output, the paper indicates.
“In other words, the economy can make more stuff and hire more people without causing inflation,” said a BOJ representative, who spoke on condition of anonymity. No comment on the paper was forthcoming from the central bank up to press time.
In the words of the paper’s author, at the start of 2021, Jamaica’s negative gap was estimated at approximately 2.9 per cent. This compares to the lowest negative gaps of 8.6 per cent for the second quarter of 2020 and 5.3 per cent for the first quarter of 1998. The estimate suggests that over the period of study, Jamaica’s resources were largely underutilised, Scarlet said. Over the past two years, in the context of generally low levels of inflation, the economy showed signs of fall-off in capacity utilisation, Scarlet noted.
“For the near term, the economy is expected to operate for the most part below capacity, which signals no inflationary pressures over this horizon. This has broader implications for wage setting, inflation expectations and monetary policy decisions in Jamaica,” the author said.
Scarlet explained that the potential output of an economy is an estimate of the level of GDP attainable when the economy is operating at a high rate of resource use. “It is not a technical ceiling on output that cannot be exceeded. Rather, it is a measure of maximum sustainable output—the level of real GDP in a given year that is consistent with a stable rate of inflation,” he said.
The unemployment rate moved from some 15 per cent in the second quarter of 1998 to roughly 9.0 per cent in the second quarter of 2007, then increased gradually to 16 per cent in the second quarter of 2013, before declining to a low of about 7.0 per cent in 2020 prior to the pandemic, under which unemployment rocketed to levels above 12 per cent, according to data from the report.
BOJ’s monetary policy objective aims to maintain inflation within a target range of 4.0 per cent to 6.0 per cent per annum over the medium term. This inflation rate, measured as the annual change in the consumer price index, is estimated by the Statistical Institute of Jamaica.
The BOJ states that the target range will be optimal to support Jamaica’s long-run growth. But it is also consistent with the programmed reduction in public debt.
Annual inflation is currently tracking below the central bank’s target range, at 3.8 per cent, at its last estimate in April.