THE Jamaica Chamber of Commerce’s index of business confidence increased to 114 in the second quarter of 2010 from 99.4 in the first quarter, its highest level in two years. Of particular note was the sharp increase in the business expectations portion of the index, from 91.6 to 109.9, compared with the much slower increase in the index of current business conditions, which increased from 119.2 to 124.2.

More businesses expected the economy to improve, 52 per cent, than ever before (up from just 34 per cent in the first quarter of 2010), with only 25 per cent expecting the economy to worsen.

Commenting on the results, University of Michigan Professor Richard Curtin revealed that before he reviewed the numbers, he had given a higher probability to a negative outlook (that the indexes would continue to fall), than his positive hypothesis. “Firms recognise that they now face the best opportunity in years to improve economic and social conditions to the advantage of all Jamaicans.”

The surge in optimism is due to the depth of the recession, favourable responses to recent economic policies (businesses assume no backsliding) and ongoing improvements in the global economy.

In assessing how sustainable this rise is (a question that has received surprisingly little attention in the media), it is useful to dig deeper into the responses to the survey question why businesses now expect “overall economic conditions in Jamaica to be better.”

Most obviously, there was a nearly tenfold increase to 26.9 per cent in the number of businesses citing the economy as either having “stabilised, growing or the stability of the Jamaican dollar”. More than double, or 19.2 per cent, cited government as implementing “corrective programmes to lift the country”. The impact of the debt exchange was no longer cited (mentioned by 11.5 per cent in the first quarter), and “IMF stringent measures will show results” had fallen by half to 11.5 per cent of respondents.

The business confidence release noted that “Ongoing changes in government policies in response to the IMF as well as the easing of the global recession had convinced firms, especially larger firms, that the economy is headed in the right direction.”

In a recent speech on the macro-economic benefits of the Jamaica Debt Exchange, Grace-Kennedy chief executive Douglas Orane appears to agree. Referring explicitly to the rise in local business confidence, he argues that “With this increase in confidence, certain business undertakings which have potential comparative and competitive advantages but had been put on hold, can now be reconsidered for development.” According to Orane, areas for increased local investment included agriculture (non traditional produce and agroprocessing), mining e.g. limestone, entertainment (music and film) and information technology eg call centres.

Perhaps unsurprisingly, the third highest factor at 17.3 per cent (an increase of nearly one half from the previous quarter), was the “decrease in crime, drug lords/increased efforts to fight crime/less corruption in the system”. It is noteworthy that the business survey occurred between April 12 to June 20, prior to the arrest of Mr Coke, and that the survey does not therefore include the full impact of recent falls in key crimes such as murder.

The positive reference to “global conditions” was supplemented by a nearly four fold increase to 11.5 per cent in the positive response that the “Results of US stimulation package will soon filter down”. Professor Curtin cautions, however, that businesses may have overestimated the strength of the global economy given the rising uncertainty among Jamaica’s trading partners, with the global economy more likely to move sideways without further positive developments. His latest University of Michigan preliminary survey of US consumer confidence, to be released today, is expected to show a fall, reversing the small rise in June.

A double dip? Possible but unlikely

One of the key current concerns of the international markets is the possibility of a double dip recession in the US, part of a wider debate between those advocating greater “stimulus” of their economy, and those arguing for a reduction in America’s very large budget deficit. Whilst Curtin argues that a “double dip” recession next year is “possible but unlikely” in a piece of the same name dated June 18, and in a private conversation estimated the probability at only 25 per cent, he nevertheless expects the pace of US consumer spending to slow through the balance of 2010 and 2011 due to relatively weak growth in household incomes. Tellingly, Curtin reports that 50 per cent of US consumers reported a decline in their income and wealth in 2009 (an all-time peak since the question was first included in the Michigan survey in 1946), and this figure has fallen only slightly to 44 per cent in the first half of 2010.

In his piece, Curtin observes that US consumers do not expect any significant improvement in their incomes or job prospects during the year ahead. “As a result, consumers will continue to make their discretionary purchases contingent on the availability of discounts. This reaction will put significant downward pressure on the prices of homes, vehicles, and household durables in the year ahead”.

In summary, whilst the rise in business confidence is encouraging, the weak international economy continues to pose a significant threat to Jamaica’s prospects for economic recovery.