Friday, June 22, 2007

2007/08 growth projection

I have commented that I do not expect the Jamaican economy to grow at the projected 3 percent this fiscal year. While I really do hope that I am wrong, an examination of the numbers, and what is happening in the economy, does not support a 3 percent target. Last year the projection was for 3 to 4 percent and we came in at 2.5 percent. And this is amidst (1) no hurricanes; (2) record levels of confidence; (3) world cup cricket preparations; (4) highway 2000 road construction work; (5) construction of the Spanish hotels; and (6) strong regional and global growth.

In addition to the fact that many of these factors will not be present, or will slow down this year, the period January to March 2007 (Q107) came out at just 2 percent. This is not to be included in the current fiscal year numbers but was a period in which we had high confidence levels reported and a lot of work due to world cup. Going forward the factors will not be as favourable as in Q107.

Inhibiting factors
The following will affect growth going forward:
1) The hurricane season is predicted to be even more active than last year’s prediction. The quiet season last year was because of the emergence of El NiƱo, which is not expected this year. We are expecting 13 to 17 hurricanes this season, with 3 to 5 major hurricanes, and all we need to have a disaster is a little rain or wind as we have so neglected our environment;
2) Crime has significantly increased from the downturn at the end of last calendar year, and therefore I expect that this would have negatively affected confidence;
3) This is an election year and the predictions of violence will no doubt lead to a wait and see attitude until after election, and from all indications the date is being dragged out, which is not good for the economy. Many persons are also waiting on the announcement of the date to book airline tickets. We must start having a fixed date for elections;
4) There is no more preparations for world cup, so we will find a slow down in capital expenditures;
5) Not much work is left to be done on the Montego Bay leg of Highway 2000, and I can bet that the next leg will slow down given the tight funds situation;
6) Most of the Spanish hotels have been completed and Harmony Cove construction activity may not have any significant impact on the fiscal year;
7) The regional and global economy is projected to grow at a slower rate than last year, and China’s undervalued Yuan has seen the USA buying more from China, which could negatively affect us. In addition there is a possibility that China’s equity market could see a significant correction this year that could affect global markets; and
8) The companies on the stock market will not see any significant growth in profitability overall. Most of the listed companies are financial institutions and I expect that the securities dealers especially will continue to under perform the previous year. We also see companies like Jamaica Producers showing worst results, which I expect will continue for another one or two quarters. Companies like Cement Company and Hardware and Lumber, although showing improved performance, is doing so against the background of the cement crisis last year. There is one or two companies that I expect will do better but I will keep that to myself until I have had enough time to do the analysis and buy them.

PIOJ growth numbers
When one looks also at the numbers presented by the PIOJ, it supports the argument that growth will be closer to 2 percent for 2007/08. Growth in the Q107 was driven by 2.5 and 1.5 percent growth in the goods producing and services sectors respectively. The main contributor to growth in the goods sector is agriculture. In 2006/07 fiscal year the agriculture sector was the fastest growing. But this was because it was recovering from the effects of the hurricane in the two previous years. The sector therefore stabilized in 2006/07 and growth is expected to be moderated in 2007/08, as evidenced by Q107 when growth in this sector came in at 4 percent compared to 22.9 percent the previous year.

The main contributor to growth in the services sector is Tourism, in the Miscellaneous Services category. In Q107 this sector declined by 0.8% compared to a growth of 9.2 percent the previous year. Tourism was down in the quarter even in the March when an improvement was expected as a result of world cup cricket. I believe that at best Tourism will be flat for the fiscal year, and therefore growth of the services sector will be affected. In addition, the financial services sector is not expected to see any significant growth based on the expected company performances, and government services should remain flat given the tightening in the budget expenditures.

Therefore the two main sectors that provided exceptional growth last year, when we only came in at 2.5 percent, will see a slow down. Construction may see some growth, but with no world cup activities and a slow down in the highway project, we will not see enough upswing here to make up for the slow down in these sectors. Overall the services sector, which accounts for 70 percent of the economy, grew by only 1.5 percent. So although the goods sector grew by 2.8 percent, this only represents 30 percent of the total economy. I expect that the services sector will continue to lag behind the goods sector for the reason mentioned above. For us to see 3 percent growth in the economy then we will have to see over 3 percent growth in the services sector.

As this is also election year, I don’t expect that much new investment activity will take place. It is important that the election be called earlier rather than later so that we can get on with the development of the country. Everyone seems to be in a wait and see attitude. One may argue that in an election year we should see more spending, as government and the opposition throws money around. This time it is different though, as evidenced by the no growth expenditure budget. In real terms expenditure is the same as the 2006/07 fiscal year. In fact a significant part of the capital expenditure budget relates to expenditures already undertaken, which would have been counted in the growth numbers in 2006/07.

When we are projecting numbers, we cannot put something down on paper just because it sounds like a good number but must have proper assumptions to support it. I wouldn’t mind if someone was to explain what the projects, and growth areas, are expected to be that will provide us with 3 percent growth in a year which seems like it will have less new activities than in 2006/07. Importantly also the tourism projections had to be recast because of the lackluster performance during world cup.

This is my simple logic as to why I do not think that the economy will grow at 3 percent this year. I would love for someone to disprove my logic, as I really would like to see us growing at 5 percent this year, but until then I see nothing to convince me that 3 percent growth will happen. I have a bet riding on it, and if I am right then you can catch me at Christopher’s enjoying my winnings.

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