Editorial | Negotiating an era of economic uncertainty

August 23, 2019 will probably, in retrospect, be seen as a day of great significance in analysing current global economic trends. It was the day that United States President Donald Trump excoriated his Federal Reserve chairman, Jerome Powell, as an enemy greater than China for not lowering the interest rate further; the day on which the US-China trade war escalated dramatically; and the day on which both the International Monetary Fund (IMF) and the Federal Reserve (Fed) highlighted the significant increase in the downside risks to global growth.

It was good, therefore, to see our own minister of finance, Nigel Clarke, on the same day, taking the signals seriously. He was reported as saying that Jamaica was cautiously optimistic but monitoring the prediction of recession. Unlike the 2008 global financial crisis, when the then minister of finance, Audley Shaw, surprisingly and unwisely told the country that a global recession would be good for Jamaica, Minister Clarke is a lot more circumspect.

A major challenge that economists and central bankers are facing today is that the main indicators are sending mixed signals. The celebrated US inverted yield curve, which occurs when people are willing to accept a lower rate of interest for longer-term government bonds than they are prepared to take for a shorter-maturing instrument, is back with us, suggesting that a recession may be imminent.

The occurrence in the past of an inverted yield curve was seen as a safe predictor of a recession within two to 10 months. Given the inexact nature of economics, no one will use this predictor with absolute certainty today. Economic models are not absolutely precise mechanisms.

Just like before the last recession, most of the indicators that people were looking at did not show its likelihood. In fact, all the major financial institutions that collapsed in the opening days of the crisis had AAA ratings.

Today, there is great uncertainty about the real direction of the global economy. According to IMF chief economist Gita Gopinath, “There are already a lot of factors weighing on global growth,” and she pointed out that “the data that’s coming in, especially on the trade front, on manufacturing and industrial production remains very weak. The service sector has provided some respite”.

The US Federal Reserve chief, Jerome Powell, noted that “the (consumer-led) conditions in the US economy remain favourable”; however, “significant risks still loom”. He pointed out that the Fed has “no recent precedents” to guide policy in the face of whipsawing trade policy.

Mr Trump’s attack on the Federal Reserve chief, along with the ratcheting up of the trade tariffs, would have contributed to further exacerbating global market uncertainty.

Strengthening of the US dollar

Weakness in the rest of the global economy, relative to the US, has caused a strengthening of the US dollar as people move funds for greater safety in the relatively strong US economy. This will have the tendency of pushing up the value of US dollar and thus weakening US exports. In these circumstances, suppression of US interest rates is not certain to lower the value of the US dollar.

The stronger US dollar will be positive for US travellers to tourist destinations like Jamaica. However, the negative wealth effects from the weaker equities market may temper this positive for tourism. So, the analysts for the Government will have to pay close attention if Minister Clarke and his colleagues are to get the right readings.

The recent negative developments in the local sugar and bauxite and alumina industries, along with the emerging global economic slowdown, do not augur well for the higher growth that Jamaica has programmed. It is, therefore, good that the minister of finance is paying keen attention to current events.