From Caribbean Overview

Summary: Early signs point to a continued softening of global economic growth thus far in 2023, amid stubborn price pressures and sustained tightening of monetary policy in advanced markets. However, some economies, including the region’s major trading partners, posted a stronger-than-expected output performance in Q1, and while international food and energy prices have retreated from their 2022 highs, underlying inflation has remained more persistent than desired, compelling major Central Banks to remain steadfast in their course to cool consumer demand. In June, the Bank of England announced its 13th consecutive rate hike since December 2021, but inflation only slowed to 7.9% y/y during that same month, after peaking at 11.1% y/y in October 2022. After pausing rate hikes in June, the Federal Reserve again increased its policy rate in July, and the Bank of Canada announced rate hikes in June and July following a brief hiatus in March and April. However, latest data indicate that inflation rates in the US and Canada retreated to 3.0% and 2.8%, respectively in June. Nevertheless, after declining 39% y/y in June 2023, oil prices shot up by 15% by the end of July attributed to supply concerns, underscoring the ongoing uncertainty in global commodity markets.

Economic activity in the Caribbean likely sustained its recovery progress in Q1 as most markets continued to stride toward pre-pandemic levels of output and employment. Pent-up travel demand spawned a strong rebound of tourism services, which catalysed growth in related sectors. Stay-over arrivals to the region advanced 41.5% y/y in Q1 achieving 98% of Q1 2019’s level, with a few markets including Jamaica, Curaçao and the Turks and Caicos Islands exceeding their respective 2019 levels. Arrivals from the US, the region’s largest source market continued to lead the recovery, but arrivals from the UK declined y/y in a few markets, while intra-regional travel posted a lacklustre performance hindered by high air fares and inadequate connectivity. Cruise passenger activity made a strong come back in Q1, after lukewarm progress in 2022, with arrivals also nearing pre-pandemic levels for most markets, and exceeding in The Bahamas, in particular, by a wide margin. Construction activity also contributed to the region’s recovery progress, as several projects that were either stalled or delayed during the pandemic got underway. Notably, the resumption of alumina production at the JAMALCO plant led to a sharp upswing in mining and quarrying, supporting economic growth in Jamaica, while surging oil output continued to propel growth in Guyana. However, preliminary indicators suggest a steady performance of energy output in Trinidad and Tobago.

The pace of growth of regional consumer prices began to slow in early 2023, after quickening over the previous two years. Regional inflation decelerated to 5.7% y/y in March 2023 relative to 7.0% y/y in December 2022 but remained above the 5.1% y/y recorded in March 2022, although inflation rates in a few markets declined y/y. While declining global commodity prices contributed to slower growth of some price categories including transportation and utilities, the rate of growth of food prices remained elevated for some markets at the end of March 2023. Meanwhile, Jamaica’s inflation rate declined to 5.8% y/y in April 2023, returning to the Bank of Jamaica’s (BOJ) target range following 20 consecutive months of above-target inflation, but quickened slightly to 6.3% y/y by June 2023. The BOJ kept its policy rate at 7.00% in June, unchanged since November 2022.

The strengthening tourism recovery coupled with higher prices, employment and business profitability led to improved fiscal balances for most regional Governments. The upsurge in revenue collections more than compensated for increased spending in some instances, largely due to higher costs of goods and services, public sector wage and salary adjustments, and rising interest rates on external floating-rate debt and domestic debt in the case of Jamaica. Robust Citizenship by Investment (CBI) receipts also supported improved fiscal operations in St. Kitts and Nevis, though such inflows declined in Antigua and Barbuda, and in Dominica. Greater energy receipts led to an improved fiscal position in Trinidad and Tobago, facilitating deposits into its Heritage Stabilisation (HSF), which also experienced a reversal of the losses incurred in FY2021/22 due to elevated market volatility, while withdrawals from its Natural Resource Fund (NRF) and receipts from its first Carbon Credit sales, augmented revenue collections in Guyana. The Government of Bahamas’ fiscal performance continued to improve though gross financing requirements for FY2023/24 remain large, and the Government of Barbados reported that it met its primary balance target for Q1 of FY2023/24, though the surplus shrank y/y.  The rebounding economies also spawned improved public debt-to-GDP ratios relative to pandemic highs, but fiscal consolidation continues to be top-of-mind, with most Governments pursuing strategies with specific targets aimed at reducing debt to sustainable levels, while navigating the higher external interest rate environment.

Healthy tourism inflows supported an expansion in the stock of FX reserves in most markets, while FX reserves in Trinidad and Tobago also nudged upward, echoing the upswing in energy exports. The revival of economic activity also supported an acceleration of credit growth at commercial banks over the 12 months to March 2023 following a weak performance since the onset of the pandemic, while deposit growth slowed further after peaking in 2021, when Governments’ use of external borrowing proceeds replicated in a surge of deposits in the banking systems of most markets. However, excess liquidity of most markets remained ample and domestic currency interest rates generally continued to decline, though they have started to turn upward in few, including Jamaica where banks have made modest adjustments in response to the BOJ’s sharp increase in the policy rate. Regional banking systems’ loan quality and profitability improved in most markets, while capital adequacy remained at acceptable levels.

In its July 2023 World Economic Outlook Update, the IMF continues to project a further slowdown of the global economy in 2023 largely led by slower growth in advanced economies, but the better-than-expected Q1 performances prompted modest upgrades relative to its April 2023 Outlook. World real GDP growth is now expected to slow from 3.5% in 2022 to 3.0% both in 2023 and 2024, with US real GDP growth in particular, projected to slow from 2.1% in 2022 to 1.8% and 1.0% in 2023 and 2024, respectively. The IMF also continues to project that inflation rates in advanced economies will moderate in 2023, before converging nearer to target levels in 2024. As growth weakens and inflation slows, major Central Banks are expected to gradually ease their monetary policy stance, with interest rates peaking later in 2023 or early 2024. Meanwhile, as economic recovery in the Caribbean matures, real GDP is projected to continue to expand in 2023 and 2024, but at more typical rates, while regional inflation is also projected to decelerate over the same period, albeit at a slower pace relative to advanced economies. However, risks to both global and regional outlooks remain primarily on the downside including potential intensification of the war in Ukraine, inflation persistence and longer than expected monetary tightening, which could weigh on growth prospects, while voluntary production cuts announced by Saudi Arabia in June could add greater volatility to oil prices. In addition to the spillover effects of global risks, the threat of weather-induced shocks due to the 2023 Atlantic hurricane season also poses a risk to Caribbean’s economic outlook.