JAMAICAN BUSINESS AND CONSUMER CONFIDENCE SURGES

UNCLAS SECTION 01 OF 02 KINGSTON 000771 SIPDIS 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 BUSINESS AND CONSUMER CONFIDENCE SURGES DESPITE WEAK ECONOMIC FUNDAMENTALS REF: A.) KINGSTON 693 B.) KINGSTON 633 ¶1. Summary: Data released by the Jamaica Conference Board on April 4 showed that confidence soared to record levels during the first quarter of 2006. Consumer confidence was underpinned by improvements in economic conditions and expectations for further output growth and job prospects, while business confidence was driven by the prospects for economic expansion and improved investment activity. The improved confidence appears to be tenuous as best, given that the economic fundamentals remain weak. Consumer confidence could wane in upcoming quarters if expectations are not met, while business confidence will depend on the performance of the economy. End summary. ¶2. Data published by the Jamaica Conference Board on April 4 revealed that Jamaican businesses and consumers are both displaying high levels of confidence in the future. According to Professor Richard Curtin of the University of Michigan, who interprets the data, confidence is at a five- year high. "Right now, data indicate that GDP growth will be higher this year than at any time over the last decade," he said. The index of consumer confidence surged by almost 28 percentage points to 124.2, the highest level registered since surveys began in 2001. Confidence was driven by expectations of higher economic growth, improved job prospects, and gains in current economic circumstances. Residents of all regions, except tourist areas, recorded a peak in consumer confidence. Residents in the tourism belt did not share this level of optimism despite buoyant tourist arrivals and the ongoing construction boom, suggesting that residents are cognizant of the susceptibility of the sector to hurricanes. ¶3. The results of the first quarter survey show that consumers held the most optimistic view of the economy recorded in the history of the surveys, with only 27 percent anticipating an economic downturn relative to 52 percent in the previous quarter. Consumers were equally optimistic about the prospect for jobs, with one-in-four Jamaicans expecting expanded employment opportunities, the best outlook since 2002. This is not unexpected, given that there is a close correlation between economic expansion and job creation. However, in recent times Jamaica has been affected by a phenomenon referred to as "jobless growth," despite record levels of foreign direct investment. A number of Jamaicans are also considered "unemployable" due to their lack of skills, and even if skilled jobs are created Jamaicans might not be able to fill them. Consumers also held the most positive expectations for income increases since the surveys began, with almost half of those surveyed anticipating higher incomes this year. So high is the salary expectation, that a record 60 percent of all families are anticipating an improvement in their standard of living during 2006. The number of people planning to buy homes doubled relative to last year, reflecting: (1) anticipated higher incomes, following the expiration of the public sector Memorandum of Understanding (MOU),which froze and restrained salary increases in both the public and private sectors; (2) a significant increase in benefits from the National Housing Trust; and, (3) declining interest rates. ¶4. Business confidence rose by 12 percentage points to 119.3 during the first quarter of 2006, below the peak of 127.3 a year ago. Rebounding business confidence was underpinned by more favorable expectations of output growth during 2006. Businesses were also upbeat about the investment climate and their financial situation. The survey revealed that one in three firms expect the economy to expand, while only 25 percent expect worsening economic conditions, a dramatic recovery from the 54 percent registered at the end of 2005. Business confidence was also bolstered by expectations of improved profits during ¶2006. Over 50 percent of the firms polled anticipated greater profits, while only 12 percent expect declining bottom lines. With economic buoyancy anticipated, 37 percent of businesses thought it was a good time to engage in investment opportunities, up from 31 percent during the last quarter of 2005. However, investment projects remain stymied by relatively high interest and crime rates. Nevertheless, over 60 percent of firms reported an improvement in their financial status, just below the peak KINGSTON 00000771 002 OF 002 recorded a year ago. ¶5. The optimism, paradoxically, has not spilled over into the wider investment community, with the local stock exchange continuing to decline. Courtney Williams, a Ministry of Finance contact, told emboff that the evidence does not appear to support the buoyancy, given the bearish mood of the investors in the equities market. Output and inflation apart, the economic fundamentals appear to be weakening, with the GOJ expected to overshoot its revised fiscal deficit target of two percent of GDP (ref. A). This could lead to increased borrowing in upcoming periods, putting pressure on the very interest rates businesses are watching to increase investment. The current account deficit, which ended the year at around 10 percent of GDP, could also widen to near 12 percent this year, adding to the instability in the foreign exchange market. This, combined with a disputatious industrial climate (ref. B) gives cause for concern. However Keith Collister, of the Jamaica Chamber of Commerce, supported the findings of the survey. Collister told emboff that business sentiment is built on the prospects for economic expansion. He thinks that agriculture, construction and tourism could provide this impetus for growth. "This could be the best year of economic growth in a decade," Collister said. He maintained that, barring major shocks, economic growth should be between 2.5 and four percent. When asked why the optimism was not filtering to other areas of the market, Collister reminded emboff that the expectations were among real businesses and not the wider investment community. ¶6. Comment: While business confidence is generally more robust and sustainable and should therefore not be underestimated, the improved confidence appears tenuous, given the weakening economic fundamentals. Businesses often tend to be more upbeat at the start of the year, and this has been bolstered by the recent political changes and the attendant possibilities. Consumer confidence, on the other hand, is more fragile and could be grounded in political expectations and hopes of a significant wage adjustment throughout the society. Any deviation from these expectations could stymie spending plans and shatter confidence among Jamaicans. End comment. TIGHE