Depressed Christmas amid signs of hope

Dennis Morrison, Contributor

If we are to judge by the uptick in the poverty figures and the rise in the unemployment rate, this festive season is going to be a sombre one for many Jamaicans. My supermarket operator tells me that in the past, it used to be the case that there would be a noticeable pick-up in spending in the two weeks leading up to Christmas. But in recent times, that window is now compressed to the last three days prior to the big day, and so far this year, it is looking even slower.

Depressed spending levels reflect the pressure on people's pockets that has come from the downturn in major sectors of the economy and big job losses. They have also been hit by several rounds of tax hikes, and persisting increases in utility bills, while remittances, which have been a cushion, have suffered a fallout. So far, the reaction has been subdued, no street protests or strike actions as occurred in past periods of severe adjustment, but the extent of the damage to the social fabric is yet to be fully assessed.

Given our close links to the United States (US), some Jamaicans will be looking for signs of hope in a turnaround of the American economy. Last year, this time, the signs were getting stronger that having halted the recession, Americans were looking forward to a pick-up in the pace of their recovery. Naturally, it was felt that this would have positive effects on our own economy, especially through tourism and remittances. But by the spring, the US recovery stalled, and that contributed to the continuing downturn that we are experiencing.

Impact of the faltering US economy

The impact of the faltering US economy would no doubt have been felt by those who depend on remittances. These had fallen sharply in 2009, but were bouncing back in the early months of 2010. By mid-year, however, recipients would have felt a slackening in the pace of recovery of inflows, and in fact, by October, the rate of increase had slowed to a crawl. The same is true for the rate of increase in the arrivals of American tourists, which tapered off after impressive levels earlier on.

Recent economic data out of the US suggest that better days may be ahead. Last week, reports of retail sales and housing starts showed better-than-expected increases, coming on top of upward revisions in GDP growth for the second and third quarters. Retail sales rose for a fifth consecutive month in November and because consumer spending accounts for over 70 per cent of US economic activity, analysts are forecasting that GDP growth will strengthen in the last quarter.

The housing sector, which is one of the drivers of the US economy and which experienced steep contraction in the recession, appears to be levelling off. Housing starts went up in November by 3.9 per cent, a faster rate than was expected, while the figure for October was revised up as well. On the job front, there is also encouraging news with private-sector hirings rising, while weekly first-time claims for jobless benefits is continuing a recent downward trend.

There is, as well, the tax-cuts bill passed by Congress on Thursday, which effectively represents another fiscal stimulus of US$850 billion. The consensus is that this will accelerate the rate of US economic growth next year and in 2012, and add up to 2.5 million jobs. Combined with the other round of printing of money by the Federal Reserve, euphemistically called 'quantitative easing', the tax cuts should soon lead to a significant improvement in the economic environment in the US.

Two factors are likely to constrain the global economy and affect the upturn in the US: the continuing financial problems in Europe, and anti-inflation measures that China is contemplating. European financial markets have been rattled by the escalation in the indebtedness of several EU countries and the weakening of their capacity to service their debts. After bailouts for Greece and Ireland, there are fears that the financial crisis could spread to Portugal and Spain and eventually undermine the euro. The corrective fiscal measures are depressing Europe's recovery while the uncertainty has had a spill-over effect on US stock markets and economy.

In the case of China, policymakers are worried about the overheating of the economy and are clamping down on bank lending and pushing up interest rates. These actions are expected to cool down inflation and slow the pace of growth. But this in turn will cut China's demand for imports and hurt the growth of the exporting countries, including the US.

Overall, the external environment is still likely to improve next year. The restraining factor on the local economy could be the pressure exerted by policies to correct the deficit in public finances. While recurrent expenditure remains tight and exports will take time to recover, increased spending on capital projects will be necessary to move the economy out of recession.

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