Jamaica's central bank has maintained its forecast for a decline in output of between three and four per cent this fiscal year, but said that inflation could be up to two percentage points lower than previously projected.

Expectations are that the pace of Jamaica's decline will slow in the second half of 2009, as its rich trading partners recover.

Revised inflation

"The forecast for headline inflation for the fiscal year has been revised downwards to the range of 10 to 12 per cent, from the previous forecast of 11 to 14 per cent," Derick Latibeudiere, the governor of the Bank of Jamaica (BOJ) said at his quarterly briefing of analysts and journalists on Wednesday.

But Latibeaudiere did add a rider to his latest inflation forecast: it could be upset by adverse weather conditions that harmed agriculture and drive up food prices that have moderated in recent times.

The central bank's more buoyant outlook on prices was despite its estimate that output fell between 3.5 per cent and 4.5 per cent in the three months up to the end of June - to register its sixth straight quarterly decline and the deepest quarterly slump for a decade - and its expectation that GDP will decline by three to four per cent in the September quarter compared to the same period last year.

But while Latibeaudiere did not forecast an up-tick, he believed that Jamaica was nearing the end of the worst and was on a clear path to stability, to be helped by an easing of the global downturn.

"We expect that the major contraction will occur in the first half of the year, with the rate of decline slowing in the second half of the year as the world recession moderates," said Latibeaudiere in explaining his GDP projection for the full fiscal year.

Germany and France emerged from recession in the second quarter, it was reported Thursday, while the US is predicting growth in the third.

Economy hit hard

The Jamaican economy has been hit hard in recent months with the near collapse of its alumina industry, marked by the closure of three of the island's alumina refineries.

Sectors such as manufacturing, construction as well as transport are also expected to continue to retreat.

However, the BOJ governor maintained positive outlooks on agriculture, which continued its recovery after the storms of recent years, as well as hotel and restaurants.

On the issue of inflation, the central bank suggested its new forecast was predicated, in part, on the outturn of the previous quarter, the response of the economy - hit by weak domestic and external demand and uncertain about future prospects - to the big tax packages, announced by the Finance Minister, Audley Shaw, in April and the current stability in the foreign exchange market.

"This revision (in the inflation forecast) is largely due to the lower-than-expected pass-through of some of the recent tax measures as well as the deceleration in the rate of depreciation of the domestic currency," Latibeaudiere said.

Between April and June the Jamaica dollar devalued by 0.29 per cent, after its double-digit slide in the previous quarter.

In the current quarter, Latibeaudiere expects that headline inflation, influenced largely higher energy prices and seasonal supply and demand factors, will run at between two per cent and 3.5 per cent, against 2.7 per cent between April and June, which was in itself less than half of the outside projected range of five-and-half per cent for that quarter.

Price index

However, the central bank's boss says the consumer price index will be moderated by the continued excess production capacity in the economy, depressed demand partly because of job losses, lower levels of remittances and "stable inflationary expectations".

Remittance inflows have fallen 15.9 per cent since year-to-date June (see story on Page Two).

"S&P's lowering of the country's long-term foreign and domestic currency ratings to 'CCC+' from 'B-' was based on their interpretation of a set of options that were presented to the government for consideration ," said Latibeaudiere at the Bank's quarterly monetary policy report.

These proposals the government had not taken a decision on said Latibeaudiere.

But it was important, the BOJ chief contended, that the government, in coming to a decision on the options, ensure that there would be no breach of contract that would lead to the loss of public trust.

sabrina.gordon@gleanerjm.com