Economic Bulletin - July 2023

Economic Bulletin

MACRO-ECONOMIC DASHBOARD

DOMESTIC ECONOMIC INDICATORS

Inflation Rate

The12-monthpoint-to-pointinflationratehas increased by 23 basis-points to 6.04%, above the Bank of Jamaica’s(BOJ) inflation target of 4%-6%. Despite the increase this is the second lowestpoint-to-pointinflation rate recordedsinceJuly2021andmirrorstherate recorded in August 2021.The year-over-year movement was primarily driven by a 10.66% increase in the ‘Food and Non-Alcoholic Beverages’ division, along with an 8.54% increase in the ‘Restaurant and Accommodation Services’ division. These increases were however tempered by the 2.21%and0.68%point-to-pointdecreasesin the ‘Transport’ and ‘Information and Communication’divisions,respectively.

Month-over-month inflation increased by 0.63% in May 2023. This was driven mainly by the 1.81% and 0.72% monthly increases in ‘Housing, Water, Electricity, Gas and Other Fuels’ and ‘Food and Non-Alcoholic Beverages’ divisions, respectively. The increase in ‘Housing Water, Electricity, Gas and Other Fuels’ was driven by higher electricity rates which resulted in a 6.33% increase in the ‘Electricity, Gas and Other Fuels’ division. The increase was but however tempered by the 2.06% decline in the ‘Water Supply and Miscellaneous Services Related to Dwelling’ due to lower water and sewage rates. The increase in ‘Food and Non-Alcoholic Beverages’ was driven by the 0.82% and 0.72% increases in the ‘Non-Alcoholic’ and ‘Food’ divisions, respectively. The increases in the food divisionwerearesultofincreasesintheprice of yam, lettuce, pumpkin and carrot. The monthly increases were tempered by a 0.34% monthly decrease in ‘Transport’ due to lower petrol prices.

Interest Rates

Inflation continues to trend below the overnight policy rate

Exchange Rate

The BOJ’s overnight policy rate was held at 7.00%, following the Monetary Policy Committee (MPC)meetingon May19,2023. The decision to maintain the policy rate was supported by the positive inflation results recorded for April 2023, which saw inflation pulling back within the bank’s target range. The rate is likely to be maintained until Q4 of 2023, as the interest rates offered on deposits and loans have continued to see small increases in line with the policy. The next MPC meeting is scheduled for June 29,2023.

At the end of May 2023, the JMD weakened month-over-month, with a depreciation of 1.61%againstthe USGreenback.According totheBOJ’sWeightedAverageSellingRate (WASR),thelocaldollargained$1.97,toend themonthat$155.8292.Tosatisfyincreased demand for foreign exchange and avoid depreciation of the exchange rate, BOJ issued three flash sales through its Foreign Exchange Intervention Tool (B-FXITT) from May 16-18, all sales were oversubscribed. The most recent flash sales occurred during June 7-9,with the lastsale offeringUS$20M. The sale was oversubscribed with US$31.525M chasing the $20M and the

highest allocated bid price being $155.16

JMD/USD.

Net International Reserves

International Merchandise Trade

The stock of net international reserves (NIR) experienced a US$36.89 million increase month-over-month in May to close at US$4.21 billion. Foreign assets increased by US$25.86 million, mainly due to a US$44.17 million increase in currency deposits. Foreign liabilities decreased by US$11.03 million, with liabilities to the IMF accounting for 100% of total foreign liabilities, which amounted to US$522.09 million.

Expenditure on imports grew 12.20% during January 2023 when compared to the corresponding period in 2022.The increase was mainly due to increased imports of ‘Consumer Goods’, 'Capital Goods' and 'Fuels and Lubricants’ which climbed by 21.00%, 21.00% and 15.20%, respectively. Earnings from exports saw a 52.30% increase over the same period in 2022, mainly owed to a 128.60% increase in the value of exports of ‘Crude Materials (excl. Fuels)’. This caused a marginal 0.10% increase in the Balance of Trade deficit. The five main trading partners for the period were the US, China, Japan, Trinidad and Tobago and Turkey. Expenditure on imports from these countries increased by 19.10% for the same period in 2022, chiefly due to higher imports of fuels from the USA. Meanwhile,theUS,PuertoRico,theRussian Federation, Iceland and Latvia were the top five destinations for Jamaica’s exports.

Exports to these countries increased by 101.30%.

OVERSEAS

United States

The Institute of Supply Management (ISM) Purchasing Manufacturing Index (PMI) ended May at 46.90%, 20 basis points lower than the 47.10% recorded in April. This was the sixth month of contraction after 30 months of continuous growth and is also a reflection of the manufacturing sector having a seventh month of contraction following a 28-month growth period. The slight month over month slowdown shows that the manufacturingsectorisstartingto contractat a faster rate. This reflects companies managing outputs to better match demand for the first half of 2023 and prepare for the expected growth in the late summer/fall period. The decrease in the PMI was mainly supported by a 310 basis points decrease in the New Orders Index which has contracted at a faster pace, as well as a 560-basis point decrease in the Backlog of Orders Index, the lowest level since the Great Depression. These reductions are indicative of business uncertainty as demand has once again eased. Similarly, the ISM Services Index registered a 160 basis points decrease from 51.90% in April to 50.30% in May. The release from the US National Association of Realtors (NAR) on pending

home sales showed that the index remained unchangedat78.90 in April2023.Year-overyear pending sales fell by 20.3% when compared to April 2022. Chief economist at the NAR, Lawrence Yun, stated that the limited housing inventory as well as affordability issues continue to pose a delay in contract signings.

The Consumer Price Index for all Urban Consumers (CPI-U) increased by 4.00% in May on a point-to-point seasonally unadjusted basis and 0.10% on a monthover-month seasonally adjusted basis. On a point-to-point basis, the increase was due to a 5.30% increase in the All items Less Food and Energy Index, while the energy index decreased 11.70% on a point-to-point basis. The 4.00% seasonally unadjusted increase is the lowest 12-month increase since March 2021, affirming that the pass-through effects of the Fed’s monetary tightening are being realized. The Producer Price Index (PPI) for final demand decreased by 0.30% monthover-monthonaseasonallyadjustedbasisin May 2023 and increased by 1.10% on a point-to-point unadjusted basis. The 0.30% decline in the final demand index was led by a 1.60% decrease in the prices for final demand goods.

Following the US Federal Reserve Federal Open Market Committee (FOMC) meeting on June 14, 2023, the Fed Funds Rate remained unchanged after ten consecutive rate hikes. This leaves the Fed Funds Rate at the target range of 5.00% - 5.25%. The pause comes as the Fed sees positive

inflation data,though inflation remainsabove its 2% target range. The FOMC however made it clear that the rate hike pause isn’t indicative of an end of the tightening policy with two more rate hikesexpected before the end ofthe yearplacingthe Fed Fundsrate at a projected 5.6% by the end of 2023 and 4.6% by the end of 2024.

For the month of May 2023, the unemployment rate increased marginally to 3.70% from the 3.40% recorded in April. Total non-farm payroll employment rose by 339,000. Professional and business services, government, health care, construction, transportation, warehousing, and social assistance, contributed the most to the increase in employed persons. The labour force participation and the employment-to-population ratio remained at 62.60% and declined marginally to 60.30% respectively.

China

The national Consumer Price Index (CPI) in May 2023 experienced a slight year-on-year increase of 0.2 percent. Food prices rose by 1.0 percent, while non-food prices remained stable. Consumer goods prices decreased by 0.3 percent, but service prices increased by 0.9 percent. From January to May, the national consumer price showed an average increase of 0.8 percent compared to the same period the previous year.

In May, China's manufacturing industry witnessed a decrease in its Purchasing Manager Index (PMI) to 48.8 percent, which

was 0.4 percentage points lower compared to the previous month. This figure fell below the threshold, indicating a slight decline in the overall prosperity level of the manufacturing industry.

In May,the totalvalue ofgoodsimported and exported in China amounted to 3,446.0 billion yuan, representing a 0.5 percent yearon-year increase. While the total value of exports decreased by 0.8 percent to 1,949.2 billion yuan, the total value of imports increased by 2.3 percent to 1,496.8 billion yuan. This resulted in a trade surplus of 452.3 billion yuan.

Mexico

In May 2023, Mexico’s short-term government bond yields decreased following the previous monetary policy decision, while medium- and long-term yields saw limited adjustments. The Mexican peso strengthened, and the country's economy demonstrated resilience in a challenging global environment. The labour market remained robust, and the balance of growth risks remained balanced. Although headline and core inflation continued to decline, they remained high, with rates of 5.18% and 6.91% respectively in the first half of June. Non-core inflation remained historically low. Inflation expectations for 2023 showed slight adjustments, and longer-term expectations remained above the target. Forecasts for headline inflation were slightly lowered for some quarters, while core inflation forecasts remained mostly unchanged. It is projected that inflation will converge to the 3% target

by the fourth quarter of 2024, but these projections are subject to risks. Upside risks include persistently high core inflation, foreign exchange depreciation, cost-related pressures, and energy or agricultural price increases. Downside risks include a greaterthan-expected global economic slowdown, reduced pass-through effects from costrelated pressures, improved production and distribution chains, and more significant effects from government measures to combat elevated prices. Overall, the balance of risks for inflation remains biased towards the upside within the forecast horizon.

REGIONAL Barbados

Barbados is set to receive millions of dollars in concessionary funding from the InterAmerican Development Bank (IDB) Group for various private sector-led projects across different sectors. The IDB Group aims to increase its investments in Barbados and improve the lives of its citizens. The targeted areas for investment include infrastructure development, renewable energy, manufacturing, tourism, digitization, agriculture, the blue economy, and climate change mitigation. IDB Invest, the private sectorarmofthe IDBGroup,plansto partner withfinancialinstitutionstoprovidefinancing. While specific projects are not yet identified, discussions are ongoing with private sector players in the region. In the short term, the funding for various projects in Barbados

could amountto around US$350 million,with a portion allocated to the Barbados Water Authority for purchasing water tanks to combat drought conditions. Barbados is already benefiting from funding for modernization projects at the Bridgetown Port, and further funding is expected for a joint project between Barbados Port Inc and the private sector for a storage and handling facility. The IDB Group's IDB Lab is also supporting innovation and business scaling in Barbados and the wider region.

Dominican Republic

In May, the consumer price index (CPI) experienced a monthly decrease of -0.20%, leading to a significant drop in year-on-year inflation of 521 basis points. This decline brought the inflation rate down from a peak of9.64%in April2022 to 4.43%in May2023. According to forecast models, it is expected that year-on-year inflation will continue its downward trajectory and remain low, converging towards the central value of the target range of 4.0% by the end of June. Similarly, core inflation, which excludes the prices of the most volatile components of the CPI basket, decreased from 7.29% in May 2022 to 5.51% in May 2023.

During its monetary policy meeting in June 2023, the Central Bank of the Dominican Republic (BCRD) made the decision to decrease its monetary policy interest rate (TPM) by 25 basis points, bringing it down from 8.00% to 7.75% per year. Additionally, therateforthepermanentliquidityexpansion facility (1-day Repos) was reduced from

8.50% to 8.25% per year. Furthermore, the rate for remunerated deposits (Overnight) underwent a decrease from 7.50% to 6.75% per year, widening the lower range of the Central Bank's interest rate corridor. Thestableperformanceofforeignexchangegenerating activities has played a role in maintaining the stability of the Dominican peso, which has witnessed an overall appreciation of around 1.7% by the end of June 2023.Thispositive trend in the external sector has also supported the bolstering of international reserves, which currently stand at approximately US$16.2 billion. These reservesareequivalentto13.2%ofGDPand provide coverage for six months of imports.

Sources: Statistical Institute of Jamaica (STATIN), Bank of Jamaica (BOJ), Planning Institute of Jamaica (PIOJ), Bloomberg, International Monetary Fund (IMF), Observer, Gleaner, US Bureau of Labour Statistics, US Census Bureau, Institute for SupplyManagement,NationalAssociationof Realtors,CentralBankofBarbados,National Bureau of Statistics of China, Central Bank of the Dominican Republic (BCRD), Banco de Mexico

*Projections/Budget

^Actual

~Actual as at April 25, 2023

* Projections are taken from Bloomberg survey of economists as of April 25, 2023

* Projections are taken from Bloomberg survey of economists as of April 25, 2023