America's economic conundrum

Dennis Morrison, Contributor

To Jamaicans who pay attention, reports that the United States economic recovery seems to be faltering would have come as bad news, considering that Jamaica's economy is so heavily linked to our American trading partner, by far our largest. Whereas a few months ago the fear was about the US' budget deficit and the steep rise in its national debt, the worry now is whether there will be a return to recession, plunging the country into deflation and a long period of high unemployment.

Contrary to predictions that interest rates would have been driven up by increased deficit spending, rates in the US are, in fact, at record lows as savings have increased and investors have pulled back out of fear of economic stagnation. Notwithstanding higher spending and borrowing by the US government, inflation remains tame and has actually gone lower, another reason why interest rates are falling and why there is heightened fear of deflation.

The US is in an economic conundrum, and there is no quick fix as Americans would expect because financial crisis-induced recessions take years to be reversed. With a damaged housing market, household wealth has been devalued and the construction industry, a large employer, is going to be weak, contributing to high unemployment. High unemployment means demand will remain depressed and wages static, which, in turn, leads to slow investment activity and a sluggish economy.

Big threat

Deflation in the US and Europe would be a big threat to Jamaica's economy as these countries are our main export markets, sources of investment, and of migrant remittances. The pace of our recovery, which is already expected to be moderate, would be impaired, especially as our domestic market does not have the critical mass to partly offset weakness in external conditions. Except for Trinidad and Tobago, whose energy exports have rebounded, other English-speaking Caribbean countries must share the same concerns.

But there are advantages and opportunities for Jamaica and other developing countries presented by certain factors in the current configuration of the global economy. Take, for example, the matter of falling prices. Jamaica is highly vulnerable to imported inflation, especially given its almost total dependence on oil as an energy source, and its heavy reliance on food imports. Our vulnerability to rising international prices was most recently felt when oil and food prices soared at the peak of the commodity bubble in 2008.

Local inflation, which had been below 10 per cent, escalated approaching near 20 per cent, triggering pressure on the exchange rate and interest rates. As the world economy went into recession at the end of 2008, the demand for oil fell, and prices collapsed relieving the pressure on consumers' gasolene and electricity bills. Earlier in the year, those bills had started to pick up again as oil prices showed signs of accelerated increases. In recent weeks, with the slow-down in the recovery in Europe and the US, oil prices have slackened again, and hence, prices at the pump have eased. In fact, gasolene prices in the US are at a two-year low.

Reduced prices

The period since the recession has also seen reduced prices for consumer goods, machinery, and equipment. Falling sales have pushed merchants to slash prices across the board as they strive to stay in business. This is reflected in low inflation rates globally. Construction projects around the world are also mirroring the pressure on businesses to cut costs, which had spiralled when commodity prices skyrocketed in the bubble economy of the late 2000s.

The viability of investment projects in Jamaica and around the region had suffered as the prices of construction materials, labour, and engineering services ran away. Developers who had projects 'in the ground' during the recession and were able to weather the credit crunch benefited as suppliers cut prices in their bid to secure business. Not many investment projects in Jamaica were positioned to take advantage of this, but I can think of at least one that managed to secure significant savings.

Now would therefore be a good time for developing countries to undertake major investments, and in Jamaica's case, in energy and infrastructure, especially as loan rates are at historically low levels. Given the country's fiscal problems, this would be more feasible if the projects could be structured around public-private-sector partnerships so as to secure financing through the private-sector windows of the multilateral institutions. In the bid to refloat the global economy, these institutions have been provided with increased financing at cheap rates for on-lending to developing countries.

Countries that are heavily indebted and have high public-sector deficits, as in most of the Caribbean, will be less able to take advantage of these positive aspects of the current global situation. But many in Central and South America, who entered the recession with much stronger macro-economic fundamentals, are better positioned to exploit the opportunities. This is already showing up in their strong recovery, despite the headwinds in the global economy.

Jamaica's privatisation programme may be a vehicle to promote major public-private sector investments, tap into the attractive multilateral and other financing available, and help spur recovery.

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