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The Russia-Ukraine war pummelled the world economy in 2022. Sharply intensified trade disruptions and the accompanying surge in international commodity prices spawned inflation rates not seen in decades, compelling major Central Banks to insistently tighten monetary policy, which pressed the brakes on the global economic recovery. The IMF estimates that following a 6.3% rebound in 2021, global real GDP growth slowed to 3.4% in 2022. As the rapid increase in interest rates started to cool domestic demand, inflation rates in advanced economies have declined, but remain elevated relative to targets. In the US, the region’s largest trading partner, the Federal Reserve raised its benchmark interest rate by a cumulative 475bps since March 2022. At the same time, the US inflation rate slowed to 5.0% y/y in March 2023 after peaking at 9.1% y/y in June 2022. However, amid speculation around the timing of an end to rate hikes, two US bank failures and the takeover of systemically significant Credit Suisse rattled financial markets, inciting fears of contagion and prompting swift action by policy makers to stabilize the banking system. Despite the adverse effects of interest rate hikes on vulnerable institutions, the Federal Reserve signalled its commitment to the inflation fight, but the added squeeze of credit conditions as institutions pull back to more prudent standards, could possibly lessen the need for further monetary policy tightening. Meanwhile, after declining in the second half of 2022, oil prices fell further in Q1 2023. However, on the back of weakening global demand, OPEC+ announced production cuts in early April on top of cuts agreed last October, a move which sparked greater uncertainty for inflation prospects – immediately following, Brent and WTI Crude oil prices jumped by more than 6%. Additionally, while food prices retreated from their peak in April 2022 aided by the Black Sea grain deal, prices remained elevated relative to pre-crisis levels and displayed tentative signs of rising again in Q1 2023.
Even with the global economic slowdown, economic recovery in the Caribbean powered on in 2022 largely reflecting a robust rebound of tourism output, which accelerated growth in related sectors, including wholesale and retail trade. Stay-over arrivals to the region expanded 76% in 2022 achieving 84% of 2019’s level, with preliminary data for most markets indicating that they exceeded pre-pandemic levels since then. Cruise passenger arrivals activity also advanced during the year, but the recovery of arrivals lagged the air-segment, largely due to capacity restrictions and reduced ship calls in some markets. Meanwhile, following two years of decline in the aftermath of the global pandemic, a turnaround in natural gas production likely contributed to a recovery of economic output in Trinidad and Tobago, while a more than doubling of crude oil production coupled with greater public and private investment catapulted economic activity in Guyana in 2022.
Despite the fall-off in global commodity prices, growth in consumer prices in Caribbean continued to accelerate during 2022, though inflation rates in some markets peaked in the second half of the year, and Government interventions in a few, kept prices somewhat contained. Growth in regional consumer prices accelerated to 7.3% y/y in December 2022 compared to 4.0% y/y one year earlier with quickening evidenced across most markets. While growth in the prices of transportation, utilities and housing generally slowed, growth in the price of food continued to accelerate for most markets during the year. However, preliminary data suggest that domestic inflation rates began to descend thus far in 2023, while Jamaica’s inflation rate in particular, decelerated to 6.2% y/y in March 2023, approaching the Bank of Jamaica’s (BOJ) target range following several consecutive increases in its policy rate.
The combination of economic recovery and escalated price levels generated an improvement in the public debt-to-GDP ratios in the region that ballooned in the wake of the pandemic. Additionally, the rebound of revenue collections and the backpedalling of pandemic-related spending led to improved fiscal balances of most regional governments. Exceptionally, the Government of Guyana’s fiscal deficit widened as parliament-approved withdrawals from its Natural Resource Fund (NRF) facilitated a sizeable expansion in public spending which outweighed total receipts. Also, the Governments of St. Kitts and Nevis and St. Vincent and the Grenadines reported deteriorations in their fiscal balances largely because of the repurchase of land from the land-to-debt swap arrangement and the normalisation of official receipts following an expansion in the aftermath of the La Soufrière volcanic eruption, respectively. However, fiscal consolidation remains a top priority for most regional governments, as debt ratios, though improving, remain elevated in a heightened interest rate environment, and could start to climb again as economic growth normalises, if public finances are not prudently managed. Against the backdrop of two recently approved 24-month IMF-funded arrangements, the Government of Jamaica intends to maintain primary surpluses of around 5.5% of GDP over the next few years, in order to achieve its 60% debt-to-GDP target by FY2027/28, while the Government of Barbados exceeded its 2% of GDP primary balance target for FY2022/23 under its Barbados Economic Recovery and Transformation (BERT) programme, which is supported by an IMF Extended Fund Facility (EFF). However, while the Government of The Bahamas’ recent fiscal performance suggests that its projected improvement in the fiscal deficit for FY2022/23 may be well within reach, gross financing needs over the next 12 months remain significant and continue to suggest elevated financing risk.
The pick-up in tourism activity augmented FX inflows to tourism dependents, but growing import bills partly due to the rise in prices led to a drag in FX reserves in a few - though all remained at adequate levels – and greater energy receipts likely contributed to an uptick in Trinidad and Tobago after several years of decline. Following a weak performance over the previous two years, commercial banks loan growth accelerated in 2022, while deposit growth slowed after a substantial build-up. However, excess liquidity of most markets remained elevated, and interest rates generally sustained their downward drift. Banks’ asset quality improved in most markets but deteriorated in the Eastern Caribbean Islands and Belize, while profitability in about half of the markets slipped.
Following the marked slowdown in 2022, the IMF’s latest projections suggest that growth of the world economy will decelerate further in 2023, before a modest pick-up in 2024. In its April 2023 World Economic Outlook (WEO), the IMF marginally revised downward its projections for global real GDP growth in 2023 and 2024 to 2.8% and 3.0%, respectively. At the same time, after peaking in 2022, global inflation is projected to moderate in 2023 and 2024, with inflation in advanced economies, in particular, slowing from 7.7% to 4.7% in 2023 and 2.6% in 2024. However, grave uncertainty continues to cloud the outlook as the war in Ukraine continues and related geopolitical tensions toe the line, and as localised stresses in financial markets have sounded the alarm on potential financial stability risks. Despite the headwinds facing the region’s major trading partners, the IMF’s projections imply that economic recovery in the Caribbean will likely continue to progress in 2023 and 2024, albeit at more normalised paces, with most markets anticipated to reach pre-crisis levels of activity this year. The projected decline in economic output in the UK specifically suggests likely adverse implications for UK-dependent markets, but the recent performance of US arrivals to most markets imply a likely moderation of potential fall-out, while economic growth in Trinidad and Tobago is projected to strengthen in 2023 as projects in the energy sector are expected to boost natural gas production, even as non-energy output continues to improve. Meanwhile, inflation rates in the Caribbean are also projected to wane in 2023, though remaining elevated relative to advanced economies, before subsiding further in 2024.
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