Friday, December 21, 2012

The economy in 2013

ONE question I get a lot is: what is to be expected of economic performance in 2013? In particular, people want to know about the IMF agreement, the exchange rate, inflation, and GDP growth in particular.

My response usually is: it depends on a few things. Firstly, it depends on the timing of the IMF agreement, and even after we get the agreement signed, it also depends on what the terms of the agreement are. It also depends on what happens in terms of employment and disposable income levels. It depends a lot also on the direction of fiscal policy.

Hundreds of job seekers turn up at the Christian Fellowship Church to to apply for warden vacancies at a Correctional Services Department recruitment drive. Unemployment levels are at 12.8 per cent, according to the latest government figures.

The fact is that there are so many uncertainties that the best one can do is make some general predictions about what can be expected depending on the timing and outcome of the factor mentioned above.

What we can say is that:

1. By the end of 2012 we will be looking at an exchange rate of above 93. Going into 2013, depending on the timing of the agreement and the terms, we could see further slippage of the dollar or stabilisation and a possible small revaluation. The further the IMF agreement appears to be, then the more the exchange rate will depreciate and the longer the wait, the faster the pace of depreciation could be. Therefore, it is crucial that we have an agreement in place as soon as possible. Bear in mind that there is a time within which the agreement must occur, as the race is against the level of the NIR. What I would caution against, though, is purchasing US$ now and putting it down as cash deposits, as the possibility is that unless you have matching liabilities, then it is really too late to acquire US$ and just put it down based on the present available information. In summary, at one extreme, while I do not expect any significant revaluation, if any, at the other extreme, the level of the rate depends on the timing and terms of the IMF agreement.

2. I expect that there will be inflationary pressures, primarily as a result of the exchange rate depreciation in recent months. This, however, does not necessarily mean that we will see runaway prices, as this also depends on what happens with employment and real disposable incomes. The fear here is that if unemployment remains high, and/or disposable incomes reduce, then we could be flirting with an undesirable economic term called stagflation. This simply means the inability to raise prices, because of weak aggregate demand, even though costs have increased. The result of stagflation is always a reduction of business activity, leading to higher unemployment. In any event, I expect that 2013 inflation will be higher than 2012, and may be in the region of low double digits. If it is lower then it means that businesses will come under pressure and some may not survive. Based on the devaluation, some inflation is going to prove necessary for business survival. There are of course certain assets, such as real estate and motor vehicles, where inflation will be higher than the average. It is for this reason that I believe that real estate is a good investment, and, in fact, one should have been looking at real estate as an investment option from a few months ago. This is because prices were depressed and interest rates relatively low.

3. One question that comes up every time I speak about the attractiveness of mortgage rates is, where will interest rates go? I do expect that we will see an uptick in interest rates in 2013, but no sharp increase. The factors that will cause an increase include a weaker Jamaican dollar, and continued trade deficit problems; slightly higher global rates as demand increases for loans with a slow recovery in global growth; and increased risk in emerging market debt, such as Jamaica. However, global rates will still remain relatively low and I think Jamaica's primary source for loans will be from multilaterals, once we finalise the IMF agreement, which means lower debt rates. Financial institutions will also continue to compete for loans, as demand will remain weak and consumers will make more informed financial choices.

4. I also expect that unemployment will decrease in 2013. There are three primary factors that will lead to lower unemployment. The first is that the government will increase stimulus spending and also bring on new projects. Secondly, a signed IMF agreement, and the seeming desire to bring back law and order will lead to increased private investments. Thirdly, I see that public transportation will improve and, also, that more persons will move towards cheaper energy sources (with or without government), resulting in higher disposable income levels.

5. The trade deficit will continue to be a problem, but I think it can improve slightly. This improvement can come as a result of lower dependence on oil, for transportation, retail consumption, and more offices going with cheaper energy sources. I don't hold out much hope for industrial energy use becoming more efficient, however. At the same time, we could see a slight improvement in exports, but primarily oil and food imports could reduce and improve the deficit.

All of this is going to be dependent on fiscal policy, and timing and terms of an IMF agreement. In other words, if the government seeks to raise more tax revenue in this weak economy, then the result could be further contraction of the economy. However, if they seek to provide some stimulus to the economy, whether directly or through projects like the highway and port expansion, then the economy will improve. Another example is with regards to law and order. If the drive to improve discipline continues, then we could see greater security and confidence coming back to the economy.

An IMF agreement that comes too late, or with unfavourable terms, would do little to bring back confidence or improve living standards. Therefore, if we do not ensure that we secure a timely and practical agreement then all the predictions above will be different. The IMF, however, will only be a Band-Aid on a much bigger problem, and if we are not carafe will be back where we are today, just as we are back with a debt problem after the 2010 JDX.

I have to applaud the efforts to regularise the zoning of communities, and importantly, residential communities must be purged of businesses.

At the end of the day, however, businesses and individuals must ensure that they do proper planning now and also continue to monitor the environment, as the range of outcomes is still very dependent on policies going forward. It is important for businesses to work with the necessary expertise in order to make correct business decisions.

To all my readers, happy holidays.


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