LAST WEEK, the Bank of Jamaica reported that inflows from remittances had declined by a further US$20 million in June, pushing the total loss for the first six months of the year to roughly US$161 million. The impact of this nearly J$14.5 billion (at the current rate of exchange) loss of purchasing power would have been felt immediately, since remittances are the source of foreign inflows that percolates most speedily and fully through the economy to people at the base of society.

Reports of falling sales at shops and increased difficulty in meeting utility and other recurrent bills provide evidence of the effects, especially on the working poor and socially vulnerable groups who are totally dependent on family members overseas.

Together, with the earnings from the tourism and bauxite industries, remittances make up a large share of the purchasing power of the Jamaican population. The downturn in all three areas simultaneously must, therefore, be exerting serious pressure generally, but more so in communities that depend heavily on these sources. While recovery in the level of these inflows from all three sources is critical to the country's macroeconomic situation, people whose daily existence is directly affected by the downturn are, no doubt, most anxious about the future prospects.

Remittances likely to get worse

Unfortunately, the situation with remittances is likely to get worse, at least in the short term. At the current monthly rate of decline of about US$20 million, it is probable that by the end of August, the loss in purchasing power would have increased to J$18 billion, imposing further hardship in poor urban and rural communities. That is when the pressures to meet back-to-school expenses will be greatest. Not since the United States (US) recession in the early 1980s, when remittances fell by roughly 25 per cent in 1983, and the subsequent decline in 1986, has this kind of fallout taken place. Social safety-net programmes run by Government and private initiatives are, therefore, going to be hard-pressed to cope with the pressures, especially at a time of rising job losses locally when the affected families would be looking to remittances to help cushion the hardship.

For those most directly affected, the obvious question must be: How deep will be the decline, and when will the recovery begin?

Historical precedent shows that inflows from remittances recovered very slowly after the slumps of 1983 and 1986, and that it was not until 1992, that they returned to the 1985 level. As I indicated in the previous column, experience, including the current economic crisis, shows that the unemployment rate in the USA, Canada and the United Kingdom is perhaps the best indicator of the direction of these inflows.

Last Friday's report of a slight decrease in the US unemployment rate for July and a lower-than-expected level of job losses, provide some hope that the rate at which remittances were declining may not increase. Other US economic data, such as the slower rate of decline in gross domestic product in the second quarter, rising construction spending and home sales, also suggest that the recession may be ending. Nonetheless, the fear remains strong that the recovery of the US economy is likely to be slow, and that the unemployment rate might stay at elevated levels for two to three years, as was the case after the 2001-2002 recession.

Tourist industry

In the case of the tourist industry, stop-over visitor arrivals increased in the first half of the year as continued rapid growth in Canadian tourists more than offset the decline in the numbers from the USA and Europe. But revenues fell, as like other destinations, heavy discounting was necessary in order to attract bookings given the soft travel market. This is not likely to change in the immediate term since consumer spending on non-essential items, such as travel, is usually constrained in periods of high unemployment. Moreover, the huge loss of wealth in the major economies over the last two years and the scaling down of consumer borrowing, as households struggle to repair the balance sheets, mean that for now, consumers will be increasing their savings rate. This will serve to suppress the demand for travel.

As others have pointed out, the small hotel operators in the local industry, and particularly those in areas like Negril, have been most severely affected by the difficult market conditions. In particular, their occupancy levels have fallen as the jump in the number of new rooms has exceeded the rate of increase in arrivals in 2008 and 2009. Indications are that there was a decline of as much as 12 per cent in occupancy levels in 2008 in Negril, which accounts for the largest share of the small properties. This situation is not likely to ease in the coming months and hence the pressures to cut jobs will persist.

The greatest pressures, however, are flowing from the sharp slowdown in investment activity in the industry. With the completion of major resort projects, except for Palmyra Resorts and Spa and Secrets Montego Freeport, opportunities for employment and construction contracts are drying up in the north-western end of the island. With the lag in the impact of the global recession on the local economy now apparently over, Jamaicans are going to be forced to make adjustments in order to survive, as the full effects of the crisis are felt.

Dennis E. Morison is an economist. Feedback may be sent to columns@gleanerjm.com.