JAMAICANS are being told to brace for impact if the US economy, the world’s largest, is sent into a recession as the Federal Reserve tries to contain the worst inflation in that country for 40 years (8.3 per cent in April from a year ago) by chiefly hiking interest rates and reducing the amount of money it puts into the system each month.

Nine times, since 1961, the US central bank has embarked on a series of interest rate increases to rein in inflation. Eight times a recession followed. This is not a sterling track record, which gives hope that no recession will follow the latest round of attempts to fix inflation.

“I do believe that the recession risk in the US is rising because of the Fed actions so far and what it is proposing to do going forward, in terms of increasing interest rates,” Dr Adrian Stokes, a financial economist and chairman of the Private Sector Organisation of Jamaica’s Economic Policy Committee told the Jamaica Observer in an interview late last week on the matter.

Contextually, the Fed has to respond given the nature of inflation, which is driven alot by an economy which is overheating. Apart from runaway inflation, the US labour market is very tight, adding 428,000 new jobs in April, a figure which was between 7 per cent and 9.7 per cent above the estimates. The unemployment rate held steady at 3.6 per cent, while average hourly wages rose by 0.3 per cent from March and by 5.5 per cent year over year.

Cooling that overheating will not be easy. The hope is that the recession does not materialises, though all data point to one coming sooner rather than later.

“We do expect that there will be reduced growth starting the first half of next year,” Stokes added.

John Mahfood, the president of the Jamaica Manufacturers and Exporters Association, a lobby group, shared the sentiments. “There is, of course, a lot of concern in the US business community that any further increases from the Federal Reserve will have a disastrous effect on the economy. And we see that manifested in the stock market, which has been declining very seriously this week,” Mahfood pointed out to Sunday Finance. Rising recession fears pushed US stocks into a bear market on Friday with the S&P 500′s decline from its all-time high in January now reaching 20 per cent.

But how will all of this affect Jamaica, and that is with a big “if”, if the US economy sinks into a recession?

“I do believe we have more than a 50/50 chance of slipping into a recession. One, because we are starting, I believe, from a weaker point than the United States. The US economy is already above its pre-pandemic level and there it has a fair way to go before it slips back or starts to slow,” Stokes observed in response to the question of the impact of a possible recession in the US on Jamaica.

He explained that Jamaica is not in the same position as the United States’ economy. For starters, while preliminary estimates for the calendar year 2021 showed that the economy grew by 4.6 per cent, it is yet to recover to pre-pandemic levels. The economy declined by 10.2 per cent in 2020 due mainly to the fallout from the novel coronavirus pandemic.

“We are much weaker [than the US] and we are feeling the tailwind of COVID. The other factors that are being driven by geopolitical concerns will exacerbate the problem. Also that the Bank of Jamaica is in a very aggressive tightening stance will increase that probability of us having a material slowdown and possibly slipping into a recession,” Stokes explained further.

He added that “the options are limited” for Jamaica, in terms of trying to manage us away from going into a recession if the US economy falls into one.

“One, there isn’t the fiscal space to implement countercyclical policies, so I do not expect a lot of support from central government via the fiscal accounts to support any slowdown in economic activity. And then, given the stance of the Bank of Jamaica with monetary policy, the impact of that monetary policy will exacerbate the slowdown as opposed to countering that economic drag. So bottom line, I think we are in a tricky situation. It’s very problematic based on what the fiscal can accommodate and based on where monetary policy is heading.”

For Stokes, the first thing Jamaicans will see is a slowdown in business and consumer spending, which will have a knock-on effect, in terms of consumption and ultimately in jobs. “So consumption will slow, we will start to see expansion plans being curtailed or delayed, so, therefore, job growth will be stalled and then, if the situation gets worse, in terms of the initial effect of the slow down, then if that is material, you will see a fall-off in employment.”

Dennis Jones, an ex-economist at the International Monetary Fund (IMF) said he was less sure what will happen in Jamaica when approximately half of the economy is informal and likely not affected by financial policy tools but by other channels.

“What may trigger recession is that consumers were already deep underwater and COVID worsened that, tending to push people to save more, not least due to uncertainty. Wages haven’t moved much and inflation may be eating fast into already limited consumption options. Simply, spending may be shutting down just to survive; some may benefit from debt eroded by inflation, but not if debt wasn’t being serviced,” Jones added.

Mahfood was more concerned about the impact rising interest rates in the US could have on the housing market in that country and the spillover effects on Jamaica.

“Mortgage rates are already very high in the US…reaching 5 per cent, and when you go to 5 per cent or 6 per cent, it becomes very, very expensive to buy homes and take out a mortgage and, in particular, because the real estate prices have gone up so much. And if that happens and there is a downturn in the housing market, a downturn in manufacturing, which leads to a recession in the US, there is an immediate impact on Jamaica. Firstly, the Jamaicans living in the US are generally on the lowest end of the wage scale and they are usually the first to feel a recession, in terms of layoffs and reduced hours, and once that happens, their ability to send remittances will be greatly reduced,” Mahfood explained.

He said tourists will also be affected. “Tourism to Jamaica will be impacted. We are not yet at the level of the 2019 level, and that will be affected.” He also expressed concerns about the impact a recession in the US could have on exports and all foreign exchange earnings, and by extension, how lower inflows could affect the stability of the Jamaican dollar.

David Wan, president of the Jamaica Employers Federation, also expressed concerns about the looming recession, but proposed pivoting to the fiscal side. “I think the Government should seek to stimulate the supply side of the economy,” he said. Asked to explain further, Wan said policies should be put in place to incentivise companies to produce more, instead of just focusing on trying to stifle demand. Wan said he knows it’s hard for the Government to give up revenues currently, but at the same time proposed that machinery and equipment intended for the productive sector should be easier to import to improve production, while consumer goods for which there are no local producers should attract a lower duty to help reduce costs to consumers, in the hope of helping to contain inflation.