What are the projections? JAMAICA IS poised for growth in 2014 and beyond after materialising growth of close to one per cent in the last quarter. The Bank of Jamaica has predicted a positive 1.4 per cent growth for this quarter ending March 2014. The International Monetary Fund (IMF) also has positive projections for Jamaica this year as it expects economic conditions to improve globally. The IMF has forecasted global growth of 3.7 per cent, 0.1 percentage point higher than its forecast in October. This arises as economic activity is expected to increase in the United States (US), Asia and the eurozone area. Forecast for the eurozone is positive as exports are expected to remain strong in some southern European countries. The IMF chief economist, Oliver Blanchard, believes that global growth will revive this year as the negative effects of fiscal policies administered by many countries diminishes, the global economy gradually heals and investor confidence is gradually restored. How will it occur? More advanced economies will play a major role in fuelling growth, the US leading the way with growth projections of 2.8 per cent this year, 0.2 percentage points higher than the original forecast. The IMF also increased the growth projections for China from 7.2 to 7.5 per cent, highlighting that Chinas main difficulty will be to curtail risks in its financial sector without affecting growth. The IMF has increased its forecast for Japan from 1.3 to 1.7 per cent even though it believes the government will face the problem of cutting its budget enough to reassure investors while at the same time not losing enough fiscal space needed to fuel economic activity. Russia is forecasted to grow only two per cent this year, one percentage point less than previously announced. The IMF has also reduced Brazils growth forecast from 2.5 per cent to 2.3 per cent. Blanchard expects a complex system of capital moving across countries. How is everything interrelated? Strong growth in developing economies should fuel demand for emerging market exports which should increase supply. Growth in the more advanced economies will help to boost growth in emerging economies. However, there are challenges; as time progresses, economic growth and stability in emerging markets are becoming more susceptible to external factors, including shocks, government policy and economic activity in more advanced economies. Emerging market economies that have weak economic policies are likely to be the most affected. Culiuc and Kochhar (2013) found evidence to suggest that lower growth, coupled with lower commodity prices and higher interest rates in the more advanced economies have a negative effect on the growth rates of emerging market economies. How so? Events that reduce demand and economic stability in the more advanced economies will have spill-over effects on export and tourism-driven emerging market economies, which are more vulnerable to external conditions. Culiuc and Kochhar (2013) results showed that gross domestic product (GDP) of emerging economies falls by three-quarter per cent for every one per cent fall in GDP on any major trading partner. The terms of trade (price of imports relative to price of exports) between emerging markets and their trading partners will have an impact on overall economic performance. Also, emerging economies that are more financially integrated are more liable to interest rate changes in advanced economies. Their results show that a one per cent increase in US real interest rate reduces growth in emerging markets by 0.1 per cent. How will emerging economies cope? Although emerging market economies are vulnerable to external conditions, government policy can help to cushion these economies from external blows. Changes in external interest rates, for example, will have less effect on countries with a floating exchange rate mechanism and more effect on countries with some sort of fixed exchange rate pegged to another currency. The latter has less control over monetary policy as their policy is strongly influenced by the country whose currency they are fixed to. The amount of fiscal space a country has will help to determine its resistance to external factors. Countries with more room in the budget are in a better position to manoeuvre a more stable path. Notwithstanding this, the IMF has increased its global growth projections including that for Jamaica. Even though our fiscal space is limited, tighter fiscal policy can ensure more efficient spending.
Posted on: Wed, 19 Mar 2014 14:34:18 +0000
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