From CIBC

Summary: The world economy remained unexpectedly buoyant in 2023 despite concerns that aggressive monetary tightening in advanced economies to bridle inflation could trigger a global recession. The IMF estimates that following 3.5% growth in 2022, global real GDP expanded 3.2% in 2023, upheld by a stronger-than-expected performance in the US and several large emerging market economies. Specifically, US real GDP is estimated to have advanced 2.5% in 2023 following 1.9% growth in 2022, supported by robust private consumption partly fuelled by savings accumulated during the pandemic. At the same time, disinflation progressed markedly in 2023 largely reflecting the dissipation of energy price shocks, though the Hamas attack on Israel early October which triggered the Israel-Gaza conflict, and the Red Sea attacks from November, threatened to avert this progress. While the likelihood of a global recession appears to be in the rear view and inflation in major economies is converging toward target levels, the recent escalation of tensions in the Middle East occasioned by Iran’s direct attack on Israel in April 2024 has amplified geopolitical concerns.

Meanwhile, economic recovery in the Caribbean remained steady in 2023 with most markets achieving pre-pandemic levels of output. A strong tourism performance bolstered activity in the accommodation and food services sector, supporting growth of distribution and transportation output, while projects aimed at boosting accommodation room stock in several markets also contributed to robust growth of construction output. Stay-over arrivals to the region1 advanced 19% in 2023 exceeding 2019’s total by 3%, though performance varied widely across markets, with arrivals to Curaçao surpassing by 26% at one end of the spectrum and arrivals to Dominica falling short by 24% at the other. Visitors from the US, representing more than 70% of the total, continued to dominate the expansion, but airlift capacity constraints limited the summer performance from the US and the UK, in particular, in some markets. Intra-regional travel also improved y/y but high air fares and inadequate connectivity continued to limit the outturn. Following a modest recovery in 2022, cruise passenger activity picked up pace in 2023 with arrivals to the region surging 53%, slightly outstripping 2019’s total. Exceptionally, cruise passenger arrivals to The Bahamas advanced to 43% above 2019’s level supported by the redevelopment of the Nassau Cruise Port which facilitated larger vessels and increased passenger volumes, but arrivals to the Cayman Islands fell short by 32%, hindered by the port’s inability to accommodate some of the newer, larger cruise vessels. At the same time, rapidly expanding oil production continued to catapult the Guyanese economy, marshaling growth in the non-oil sector, while economic activity in Trinidad and Tobago likely advanced in 2023, despite an underperformance of energy output.

After peaking in 2022, regional inflation softened over the course of the year echoing the trend in global commodity prices and falling inflation in major trading partners. Growth in regional consumer prices decelerated to 3.0% y/y in December 2023, compared to 6.5% y/y one year earlier, reflecting a slower pace of increase in all markets, though the impact of domestic factors in a few placed upward pressures on select price categories. Increased public passenger vehicle fares and the impact of adverse weather contributed to a modest quickening in Jamaica, but the inflation rate returned to the Bank of Jamaica’s (BOJ) target range in March 2024, at 5.6% y/y.

The improved economic climate ushered an expansion in revenue collections for all regional Governments, but greater expenditure, mostly due to public sector wage negotiations and higher interest on external debt, led to weaker fiscal outcomes in a few markets, while public debt-to-GDP ratios generally improved, but remained elevated for most. Jamaica’s public sector compensation review largely underpinned greater spending in FY2023/24, but the Government anticipates sufficient space within its current fiscal framework to accommodate the agreed expense and maintain its commitment to reducing public debt to 60% of GDP by FY2027/28. Further, the IMF concluded the second review of Jamaica’s funding arrangements in February citing the Government’s prudent fiscal stance supported by the control of non-wage spending. Higher interest outlays limited the improvement of the fiscal deficit in Barbados, but the Government met the primary surplus target for FY2023/24 set under its IMF Extended Fund Facility, while the Government of The Bahamas’ fiscal performance improved modestly over the first half of FY2023/24 but suggests its budgeted outturn for the full year remains optimistic in the current environment.

The region’s strong tourism performance supported the preservation of international reserves at healthy levels, though they slipped in Aruba, Belize and Trinidad and Tobago, the last-named reflecting ongoing tightness in the domestic FX market. After accelerating in 2022, credit growth at regional commercial banks kept pace in 2023, propelled by higher balances to both corporate entities and individuals, including household mortgages, while the accumulation of deposit funding slowed further during the year.  Nonetheless, excess liquidity of most banking systems remained ample and local currency interest rates generally sustained their downward trend, except in Jamaica, where interest rates rose modestly in response to the BOJ’s tightened monetary policy stance, and in the Cayman Islands where prime lending rates adjusted in step with the US Federal Funds rate. Banks’ loan quality improved as the market non-performing loan ratio remained on par or declined in all markets except St. Lucia, while profitability generally increased, and capital adequacy ratios remained above required standards.

In its April 2024 World Economic Outlook, the IMF projects that global real GDP growth will remain steady at 3.2% in 2024 and 2025, remaining broadly in line with its January 2024 outlook. However, US real GDP growth is now projected to strengthen to 2.7% in 2024, before moderating to 1.9% in 2025, both upgrades relative to the previous outlook. Inflation in advanced economies is projected to continue to descend in 2024 and 2025, with Central Bank policy rates expected to commence reduction by the end of 2024. Meanwhile, economic activity in the Caribbean is forecasted to continue to expand in 2024 and 2025, albeit at more moderate paces for most markets, while inflation in the region is expected to slow further, in tow of that in advanced economies. However, several downside risks, largely revolving around geopolitical tensions, continue to cast shadows over the global economic environment. A reescalation of the war in Ukraine, intensification of the conflicts in the Middle East, and/or continued shipping disruptions in the Red Sea could result in supply shocks that generate spikes in commodity and transportation costs, adversely affecting global growth prospects.