New recession fears cast shadow over Jamaica's fortunes

Dennis Morrison, Contributor

Stock markets around the world tumbled last week as investors reacted to a growing consensus among forecasters that the global economy is moving dangerously close to another recession.

Both in the United States and the European Union (EU), important surveys also show that private-sector activity has actually declined in the last month, the first time in more than two years. This negative turn is discouraging news for Jamaicans given that the local economy is just barely beginning to emerge from a three-year slump and that we are heavily dependent on these markets.

The risk of another economic downturn has escalated in recent months as political wrangling between Democrats and Republicans in Washington stymied measures needed to reverse the deteriorating conditions in the American economy. Rather than considering proposals to stimulate demand and speed up job creation as proposed by the Obama administration, Republicans have insisted on cutbacks in public spending. Republicans clearly see political advantage in there being continued harsh economic conditions that can be blamed on President Obama.

The danger then is that in an election year, the American economy will drift along, holding back the recovery. This realisation of a stalemate in US economic policymaking is a big part of what is fuelling uncertainty by US investors and is being played out in the financial markets.

INDECISION IN EUROPE

There is even greater uncertainty in Europe where the threat of debt default by Greece, credit downgrades in Italy and Spain, and liquidity problems affecting several of the region's leading banks, are undermining recovery of the Eurozone economy. The signs are that economic growth is faltering, even in Germany and France, the region's two largest economies. Although not as divided as in America, political leaders in Europe have been indecisive about measures to resolve the region's debt and financial crisis.

The impetus provided over the past two years by the solid expansion in emerging economies led by China, India, Brazil, and major commodity-exporting countries may also now be at risk. China's rapid growth, which is substantially driven by exports and its resulting insatiable appetite for raw materials, has been a stimulus to the world economy. But as the US and other advanced economies are faltering, the demand for the exports of these emerging countries is expected to slacken, leading to slower growth. Hence, the IMF last week reduced its forecast of world economic growth for 2011 and 2012.

What does all of this mean for Jamaica and the Caribbean?

In its revised forecast, the IMF indicated that if there were to be another recession in the US, Mexico, Central America and the Caribbean would be particularly hard hit, for the obvious reason that this market is critically important to the activities that drive these economies. The most sensitive are tourism, remittances, and foreign direct investment.

TOURISM DECLINING

In the majority of Caribbean destinations, American tourists account for more than 60 per cent of total visitors and, therefore, economic conditions in the US are the overriding factor in the industry's performance. Indeed, Jamaica's tourist industry has already been feeling the effects of the softening in the US economy in the last six months. Starting in March, stopover visitor arrivals from the US have declined consistently, and this is the main reason why total stopover visitor arrivals fell in the May-August period.

The problems in the economies of the EU have also fed through to the local tourism industry. The latest Jamaica Tourist Board figures show that the number of European stopover visitors dropped by 3.7 per cent in the first five months of the year. The decline in stopover visitors from Europe and the US since May is a worrying sign, as together they account for nearly 80 per cent of our total.

An important point to note is that stopover visitors are responsible for more than 95 per cent of the earnings from tourism. Hence, the performance and future prospects of the industry must be judged by the rate of arrivals of such visitors, and not cruise passengers. Though encouraging, the recently reported growth figure (13.6 per cent) for cruise passengers up to August was, therefore, confusing.

Given the major contribution of the tourism industry to economic activity, especially employment and the generation of foreign earnings, further weakening in the US and European economies is, therefore, a real threat to Jamaica's recovery. Remittance flows, more than 60 per cent of which come from the US, have also slowed in recent months and would slip further if conditions in the American economy were to worsen. Based on current indicators, we should be preparing for a bumpy ride in the coming months.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.