BOJ recasts economic targets

McPherse Thompson, Assistant Editor - Business

The Bank of Jamaica (BOJ) has recast its projections on key economic indicators in light of the near-term impact on the Jamaican economy of Standard and Poor's downgrade of the credit rating of the United States federal government debt and the ongoing debt crisis in Europe.

Jamaica's mining industry, which has been on the rebound since last year, could suffer the largest fallout from reduced international demand for aluminium if the downgrade result in markedly slower growth for the US economy, according to the central bank's near-term assessment.

The central bank's assessment of an extreme scenario of the possible effect suggested that Jamaica would still record growth in the range of 1.0 to 2.0 per cent in fiscal year 2011-12, according to BOJ Governor Brian Wynter.

However, growth would likely be at the lower bound of the forecast range, with the risks to the projection being biased to the downside, said Wynter as he presented the quarterly monetary policy report at BOJ on Thursday.

The projection contrasts with the BOJ's previous forecast, which indicated growth towards the upper bound of the range for the fiscal year.

The moderation in output would stem from a general contraction in external and domestic demand, said Wynter, adding that the impact of the slower growth on Jamaica would be reflected predominantly in the mining, travel and transportation sectors.

"In this extreme scenario, the mining industry, in particular, could see the largest fallout from reduced international demand for aluminium," the BOJ governor said.

In addition, he said, in light of reduced global income particularly in the United States - Jamaica's largest market source for visitors - value-added in the hotel and restaurant sector could also expand at a significantly slower rate in fiscal year 2011-12, relative to the growth previously expected.

A slower rate of expansion in those industries, in addition to increasing uncertainty, would also affect non-tradable sectors such as the wholesale and retail trade, he said.

Wynter said, however, that in the context of a moderation in world demand and domestic economic growth, Jamaica's current account deficit would improve, relative to what was previous projected. This is against the background that a contraction in spending on imports would fully offset the possible fall in earnings from exports.

Financing for the current account would also be adversely affected by lower levels of both foreign direct and portfolio private investment inflows relative to previous expectations, said the governor.

Nonetheless, in the context of those changes, the bank has predicted that net international reserves would not change materially at yearend, relative to the previous forecast of about US$2 billion.

Based on the BOJ's reconsideration, headline inflation for the fiscal year could also be at the lower bound of the forecast range of six to eight per cent.

Wynter said the most significant impact would emanate from the decline in international oil prices. In turn, this would result in a direct moderating impact on inflationary impulses in key divisions of the consumer price index such as transportation and housing, water, electricity, gas and other fuels due to lower prices for petrol, fuel and household energy.

The central bank is forecasting inflation in the range of 1.5 to 2.5 per cent for the September quarter against the background of a decline in the price of crude oil, which Wynter said dropped at a sharper rate than the bank projected.

According to the governor, reduced imported inflation should temper the impact of expected increases in the prices of domestic crops, as well as inflation pressures from back-to-school expenses.

"This is expected to be supported by the continuation of excess domestic capacity conditions, as well as relative stability in the foreign-exchange market," Wynter said.

He estimated growth in the real sector at one to two per cent in the June quarter, following a 1.4 per cent upward movement in the March quarter.

Headline inflation was two per cent for the June 2011 quarter, at the lower end of the central bank's forecast of two to three per cent.

mcpherse.thompson@gleanerjm.com