Local Inflation & Unemployment. What is the story?
From our vantage point, the Jamaican economy is in a state of transition, from a “snapback” post- pandemic recovery growth phase at the backend of 2021 into the start of 2022, to an ongoing slowdown into the second half of 2022. This turn in the tide is influenced by a mix of high inflation, supply chain challenges and rising interest rates. For context, the Jamaican economy grew 4.8% for the April to June quarter of 2022 versus the prior comparable period according to the Statistical Institute of Jamaica (STATIN). Of note, the boom in the services sector continues, led by a 56% expansion followed by wholesale and retail trade growing 7.6% for the period.
However, this was contrasted by a contraction in the goods producing sector, dominated by a 62.5% decline in mining and quarrying followed by a 5.2% downturn in construction for the period. These contractions overwhelmed growth of 6.3% and 5.6% seen in agriculture and manufacturing respectively for the period.
Given that the services sector is larger than the goods producing sector, the growth profile supports local unemployment hitting a record low of 6.6% as at July 2022, coming from 8.5% as at July 2022 according to STATIN. The sector with the largest job gains was real estate, renting and business activities followed by accommodation and food service activities.
This colours our sector outlook, in that the more cyclical areas such as the retail subsector and real estate and construction should lose some momentum as 2023 approaches given the stubbornness of inflation conjoined with the lagged effect of the Bank of Jamaica’s (BOJ’s) successive rate policy rate hikes in 2022 which should largely kick-in in 2023. For perspective, Lumber Depot’s (LUMBER) revenues and profits for the three months ended July 31, 2022 were down 4.8% and 32.7% respectively year over year.
According to STATIN, point to point inflation was 9.3% as at September 2022, which is below August 2022’s reading of 10.2%. However, the reality is that inflation has remained firmly above the BOJ’s 4% to 6% inflation target range consistently since September 2021 due to structural drivers which are largely external including tight supply chains, record monetary and fiscal stimulus from the U.S. authorities in 2021 not least of all, high commodity prices partly driven by the Russia-Ukraine conflict.
The stickiness of high inflation builds the case for further policy hikes from the BOJ in the near term, especially considering the U.S. Federal Reserve’s likelihood of doing the same. This coincides with the International Monetary Fund’s (IMF) inflation outlook for Jamaica being 9% and 7% for 2022 and 2023 respectively.
Net Remittance flows fell 1.5% to US$2.27B for the January to August 2022 versus the same 2021 period according to BOJ data. Given that U.S. inflation was 8.3% in August 2022, there would be a 9.8% year over year decrease in purchasing power of net remittance flows for the eight-month period. This trend is expected to continue into 2023, creating a drag on the pace of local consumer spending.
Against this background, we expect Wisynco Group (WISYNCO) to continue to benefit from the post-pandemic services boom especially through entertainment events, tourism and restaurants.
We expect Supreme Ventures (SVL) to continue to grow as the demand for its products is inelastic and also considering its expansion of distribution points. The Limners & Bards (LAB) stands to benefit from an uptick in advertising as companies aim to make special offers and sales given the inflationary crunch on consumer spending. Fontana’s (FTNA) customer loyalty, new location coupled with its hybrid offering of a full-service pharmacy and a curated retail experience positions it to resist inflation and more sluggish conditions.
We see Stationery and Office Supplies (SOS) benefitting from its expanding product portfolio, improved capacity and larger fleet which should outweigh slowing conditions. Future Energy Source Co. (FESCO) may benefit from its expansion of locations, brand loyalty and the possibility of
energy prices being biased to the upside against the backdrop of geopolitical uncertainty, conflict in Europe and supply chain bottlenecks.
We believe the demand for One on One (ONE) ‘s training products could resist a slower economy, and that it’s Post-IPO balance sheet is strong enough to withstand rising interest rates. The education technology space itself is in its high growth phase which should propel ONE’s growth by extension.
Nevertheless, we recommend that our readers speak with a licensed advisor before making investment decisions and to stay informed in to get the most from today’s rapidly changing market conditions.