The Bank of Jamaica (BOJ) is projecting that a recession in the US economy, running to September this year, would lower gross domestic product (GDP) growth in Jamaica by 0.4 percentage point during the fiscal year that ends next March.

The growth forecast for Jamaica is three per cent for the current fiscal year.

In its quarterly monetary policy report for January to March 2008, the BOJ outlined its expectations for a US recession running for a maximum period of eight months, with declining GDP in the March and June 2008 quarters.

It also expects the US Federal Reserve to reduce the interest rate to two per cent by end June 2008, and US annual inflation will decelerate to 1.5 per cent at end-December 2008.

The Business-Cycle Dating Committee of the National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity spread across the economy which lasts for more than a few months.
In particular, an economy is considered to be in recession when there is widespread downturn in economic activity that brings with it declines in employment, production, personal incomes, total manufacturing and net exports.

"(The) marginal impact is mainly attributed to the anticipated short duration of the recession as well as the relative small contribution to GDP of the sectors which would be primarily affected," according to the BOJ report. "The adverse impact of the recession is expected to be predominantly reflected in the mining, tourism, export manufacturing and transportation industries, and, to a lesser extent, the distributive trade sector."

Tourism is expected to rebound by the last quarter of FY2008/09. The expected fall-out in mining emanates primarily from the bauxite industry as alumina production would not be significantly affected.

BOJ's projection for lower growth in the tourism sector, as well as for transport, storage and communication, is based on the expectation that there will be lower tourist arrivals from the US during the first three quarters of the fiscal year.

"The improved outlook in the last quarter is associated with the anticipated interest rate cuts by the FED," said the BOJ report. "These interest rates cuts are expected to stimulate US growth in the March 2009 quarter above the baseline projection of 0.86 per cent."

The impact on the manufacturing sector largely reflects the anticipated short-term effect of the recession on food processing.

"Further, a reduction in transshipment activity is envisaged as most of the country's cargoes are destined for Latin America, with the US being one of their main export markets," it added.
Jamaica's inflation for the FY 2008/2009 is expected to be lower by 1.6 percentage points relative to the baseline forecast of 11.5 - 14.5 per cent.

The BOJ made its assessment primarily by comparing the recession that occurred in the US from July 1990 to March 1991, because of the close similarities between the conditions that existed then and now.

Back in 1990, the US recession was characterised by a combination of higher oil prices and tightened credit conditions in the international financial markets.
The 1990/1991 US recession did not have a significant impact on the Island's current account deficit, which increased to US$309.0 million in FY 1990/91, reflecting a worsening of US$52.0 million.

"This was largely associated with a 31.5 per cent decline in net transfers to Government. The decline, however, was in a context of the significant increase in government aid and grant inflows in the previous year, which was largely associated with continued recovery from the impact of Hurricane Gilbert in September 1988," said the report.

The recession then did not have a significant impact on private remittances and the tourism industry grew by 11.0 per cent, albeit slower than the 13.0 per cent in the previous fiscal year. During the period, alumina, sugar and banana export volumes also increased by 13.6 per cent, 10.2 per cent and 16.7 per cent, respectively, relative to the comparable period in FY1989/90.

"Unlike previous recessions, commodity prices are expected to remain buoyant due to the recent increase in speculation in the commodity futures markets and strong demand from Asia," added the report. "This suggests that developments in the global capital markets should offset the income effect arising from a slow-down in the US economy. "

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