Financial returns posted recently by a number of companies listed on the Jamaica Stock Exchange (JSE) have been disappointing. Partly as a result of this, the JSE's three indices have been slipping in the past few weeks as investors go in search of better returns by diversifying their investment portfolios away from equities.

Dennis Morrison

Gasoline now sells consistently for close to $60 per litre, about 40 per cent higher than 18 months ago.

Coincidentally, stock markets around the world are experiencing steady declines but these are being driven by upward movements in interest rates in the USA and Europe.

As more and more disappointing financial returns are published, there is puzzlement in the local business community about the reasons for the slow growth in revenues. So far there is only speculation that there is a slowdown in the economy, but we are yet to hear clear reasoning as to the causes of the anaemic growth in spending. Meanwhile, the leading supermarkets, hardware suppliers, and even gaming enterprises are all feeling the effects of the sluggish consumer spending patterns.

One need not look very far to recognise the huge dent that energy prices have made in the disposable incomes of households in the Kingston Metropolitan Area, towns, and rural areas. With 92 per cent of households having access to electricity, nearly everyone feels the impact of rising oil prices on light bills.

We should remember that oil prices have moved to over US $70 per barrel in the past year, which represents an increase of nearly 50 per cent. Hence, since there has been no serious effort to reduce our consumption, more of our disposable incomes have had to be used to pay these bills.

Jamaican businesses have been as sloppy as households in terms of their refusal to adjust their energy consumption levels. As usual they are waiting to be saved by a collapse in oil prices, and therefore almost no investment has been undertaken in energy-saving devices and retrofitting of their production systems.

With their expenses increasing because of rising electricity bills and profits declining as a result, there is still no evidence of any urgency on the part of local businesses with respect to measures to reduce their energy use. Even the USA, which is renowned as a profligate consumer of energy, has raised its energy efficiency levels over the past 30 years since the first oil crisis.

The second blow from rising energy prices is being felt at the gas pumps. Gasoline now sells consistently for close to $60 per litre, about 40 per cent higher than 18 months ago. Many people who have recently acquired vehicles for the first time are not about to cut back on their driving, and must therefore set aside more of their income to meet their gas bills.

This means that their spending on other items must decline, particularly as incomes are rising at a slower rate than was the case in the 1990s or the early 2000s.

The public-sector worker is probably the most affected by this factor. In the past two years, the wage freeze arising from the Memorandum of Understanding has held public-sector wages in check. Prior to this, the rate of growth of the public-sector wage bill had slowed down to low double digits in the early 2000s after rising at rates close to 20 per cent per annum in the 1990s.

These workers have a high propensity to consume and therefore the curtailment of their incomes would have significantly affected consumer spending.

We can expect that the imperative of balancing the budget will mean continued restraint on government expenditure in the medium term. Thus spending by public sector workers will continue to be constrained during this period. Enterprises dependent on consumer spending will have to look to increased employment levels and strong growth in leading sectors such as tourism and construction as sources of new business.

The large tax package that was imposed last year would also have taken a big chunk out of consumer spending power. Those who were advocating swift action to balance the national budget in order to deal with the debt and reduce interest rates had apparently overlooked this factor.

It is almost always the case that fiscal tightening leads to deflation of the economy unless there are countervailing measures to boost investment activity and production. In our case, while there has been increased investment activity, this has not been enough to nullify the deflationary effects of the tax measures.

We should not ignore the impact of disruptions caused by severe hurricane activity last year, especially on the rural economy. There was a 7.3 per cent reduction in agricultural output that came on top of the 9 per cent decline in 2004. The blows struck by the security forces against the drug trade have also had an adverse effect on the amount of money circulating in the economy, particularly in the informal sector.

We have been experiencing strong growth in the tourism and construction sectors and this should continue, especially with the easing of the cement shortage. Evidently these positive developments are yet to counteract fully the deflationary effects of rising energy prices and the other factors mentioned earlier.

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