Jamaican Consumers Optimistic About Economy

UNCLAS SECTION 01 OF 02 KINGSTON 000379

SIPDIS

STATE FOR WHA/CAR/ (WBENT),WHA/EPSC (JSLATTERY)

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR L LAMONICA

E.O. 12958: NA
TAGS: ECON EFIN JM
SUBJECT: Jamaican Consumers Optimistic About Economy
(Corrected Version)


1. Summary: Buoyed by expectations of a rebound in
economic growth following Hurricane Ivan, consumer
confidence surged from October to December 2004.
Consumers are anticipating higher incomes and remittances,
but still expect spending plans to stagnate. Conversely,
business confidence declined due to damage associated with
Hurricane Ivan. However, businesses are expecting
increased investment and economic growth due to continued
macroeconomic improvements. There is also increasing
optimism among international investors, particularly given
the moderation in the country's fiscal deficit combined
with the build-up in the stock of Net International
Reserves. Barring any unforeseen events, both consumer
and business confidence are expected to increase
throughout 2005. Professor Richard Curtin of the
University of Michigan conducted the Business and Consumer
Confidence Survey on behalf of the Jamaica Conference
Board. End Summary.


2. The index of consumer confidence rose by 15 percent to
118.6 during October to December 2004, the highest level
since the fourth quarter of 2002. Gains in the index were
underpinned by expectations of future economic growth,
with consumers registering their most positive assessment
of the economy in over two years. Most importantly, a
number of Jamaican consumers anticipate that a jump in job
opportunities will create the best outlook for employment
in two years. Record performance in the tourism sector
and an anticipated surge in foreign investment are some of
the underlying factors explaining the buzz associated with
job creation. Expectations of higher income and increased
remittances are also driving consumer confidence.
However, consumers remain hesitant to increase spending,
suggesting that they still consider the recovery to be
fragile.


3. By contrast, the index of business confidence declined
from 108.4 to 102 during the quarter. The fall-off
reflected damage and repair costs as well as lost sales
associated with the passage of Hurricanes Ivan and
Charlie. In fact, firms reported that the costs incurred
by the hurricanes had a devastating impact on its profits.
However, most businesses surveyed expected the economy to
improve on the back of new investments in the mining and
tourism sectors, declining interest rates, stability in
the exchange rate, lower inflation, and the creation of a
memorandum of understanding between the GOJ and unions.
Over 41 percent of the firms surveyed reported that it was
a good time to expand business operations, the highest
percentage in two years.


4. International investors have also been expressing
optimism about the country's economic outlook due largely
to: (1) sustained improvement in the economy, which should
improve the country's ability to service its debt; (2)
moderation in the fiscal deficit; and, (3) the jump in the
stock of Net International Reserves (NIR). This has
influenced rating agency Standard and Poors to revise its
outlook on the country from negative to stable. European-
based brokerage house Commerzbank Securities has also
upgraded its outlook on the economy in its latest Emerging
Market Update.


5. Comment: Barring shocks, the confidence of Jamaican
consumers is expected to increase throughout 2005. This
outlook is predicated on the anticipated surge in foreign
investments and, by extension, job creation. Remittances,
which have become a significant source of disposable
income, should also continue to increase in 2005.
However, spending could continue to lag until consumers
are satisfied that the current economic gains are
permanent. Business confidence actually continued to
improve during the last month of the current survey. This
trend should continue throughout 2005, given the positive
economic developments outlined by firms in the survey.
Indeed, some of these gains have continued into 2005, with
inflation subsiding in January and the Bank of Jamaica in
February cutting interest rates for the twelfth time in a
year. Stability has also continued in the foreign
exchange market due to increased foreign exchange inflows,
resulting in a further build-up in the stock of NIR. End
Comment.

TIGHE