Investors seek safe harbours

Dennis Morrison, Contributor

While the news in Jamaica last week was dominated by the Manatt issue and will most likely continue for some time, some people might have been watching the looming financial crisis in Europe. Fear that it could become full-blown led to persisting volatility in financial markets worldwide. As last week ended, not even the announcement of a US$1 trillion rescue package designed to halt debt defaults by Europe's most fragile economies had served to dampen this volatility.

Jamaicans ought to be concerned about the re-emergence of financial instability, given the threat that it poses to any hopes of recovery for our economy, which is so vulnerable to external conditions. Those conditions, which I pointed out in last week's column were improving, are shifting, with investors seeking safe harbour, causing a near 20 per cent loss of value in major stock markets in the United States and Europe. The slide in the euro, which has been ongoing, also continued after a brief positive response to the emergency package, dropping to an 18-month low at the end of the week.

The loss in the US stock market, despite the pick-up in its economy, reflected the fragility of returning confidence in its financial system and the fear of the risk of contagion from the effects of Europe's debt crisis. Not even positive news about a pick-up in consumer confidence, retail sales, manufacturing output, and industrial production in the US seemed convincing enough to assuage investors. They remain cautious about the sustainability of the recovery of the US economy because of the modest improvement in the job market, with the unemployment rate hovering uncomfortably near 10 per cent.

Job growth

Though modest, the gains in job creation of 162,000 in March and 290,000 in April are being felt in an increasing number of states. Indeed, at the end of March, some 33 states had reported job growth, led by Maryland, Virginia and Pennsylvania, which recorded the most sizeable gains. All three are home to substantial Jamaican communities, but the state with the largest Jamaican diaspora, Florida, was among the states that suffered the largest job losses.

Nonetheless, it would appear that the pick-up in the US labour market, a key determinant of remittances, is feeding a recovery of such inflows to Jamaica. According to Bank of Jamaica data, total remittance inflows increased by 19.3 per cent in March, or by US$28.2 million, which pushed total inflows for the first three months of 2010 to US$452.3 million, or by 9.7 per cent. The upturn in March is a continuation of the recovery that began in November last year after a year-long slide that began in late 2008, as the recession in the US and other economies deepened.

The picture is much the same in other Latin American and Caribbean countries that are projecting single-digit increases this year as employment rates for workers from the region in the US are showing signs of improvement. As in the case of Jamaica, the US is the principal source of remittances for the region and, hence, the prospects for a sustained upturn will depend on the performance of the world's leading economy.

Speaking at the recent Remittances for the Future conference in Mexico City, the president of the Inter-American Development Bank noted that there were signs of "a turning point in the remittance trends, and that we can now expect a period of single-digit growth in 2010". In 2009, the Latin American and Caribbean region experienced a 15 per cent decline, the first since 2000, with inflows falling to US$58.8 billion. Jamaica saw an 11.4 per cent drop, the first time remittance inflows had declined in over 20 years.

Ease for rural households

The improved remittance inflows will provide a partial replacement of income and purchasing power extracted by way of the over J$30 billion of additional taxes imposed since October of last year. Should the rate of increase in these flows continue at the pace of the January-March period, then the replacement would amount to around US$120 million, or roughly J$11 billion. While this will only be a third of the purchasing power lost to the new taxes, it will provide some ease in the pressure on households in rural and low-income urban communities. They were badly hit by the decline in remittances last year and the downturn in the local economy, particularly in the bauxite parishes.

A major negative consequence for us of the return of instability to the financial markets is the dampening effect it is likely to have on foreign direct investment. This had become one of the drivers of economic activity and job creation, especially in our tourism and bauxite industries, but has been undercut by the worldwide recession. Recovery is dependent on positive global economic fundamentals and on consumer demand, as well as stability in the financial markets.

With the deflationary effect that the cuts in public spending and increases in taxes will have, it is all the more critical that there be a pick-up in foreign direct investment in the coming months. Hence, we should be monitoring how the European debt problems are dealt with and the response of the financial markets to get a sense of what impetus we can expect from such investment towards the recovery of the local economy.

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.