From CIBC

Caribbean Economic Overview

Summary: After intensifying to an extraordinary high in April, global trade tensions eased somewhat since then, as the US rolled back several of the harshest reciprocal tariff measures to allow for trade negotiations. US-China trade talks continued following the post-escalation tariff truce agreed on May 12, which is set to expire on August 12. The 90-day freeze on higher tariffs imposed on most other countries facilitated a temporary reduction to the new baseline 10% tariff, allowing deals to be brokered with a few trading partners including the UK, Vietnam, Indonesia, Japan and the EU. However, several countries, including Canada and Mexico, remained without a trade agreement leading up to the August 1 deadline, originally set for July 9. Meanwhile, Israel’s surprise attack on Iran in June and subsequent retaliatory strikes spawned a dramatic escalation of geopolitical tensions, accompanied by a notable jump in oil prices. US military intervention sparked fears of a dangerous spiral, but tensions receded shortly afterward, following the US announcement of a ceasefire. Despite these headwinds, advance estimates suggest that US real GDP growth outperformed initial expectations in Q2, but largely reflected a dialing back of imports after aggressive stockpiling in Q1 ahead of anticipated higher prices. Additionally, global disinflation progress appears to have stalled, with US inflation in particular creeping upward to 2.7% y/y in June, likely signaling initial pass-through from the higher tariffs.

Meanwhile, the latest round of US tariff adjustments suggest that most Caribbean countries will continue to face the minimum blanket 10% tariff. However, spillover consequences of elevated uncertainty in the region’s largest trading partner have likely started to bite for tourism dependents. Stay-over arrivals to the region¹ rose 1.1% y/y in Q1 2025 as declines to a few markets substantially offset the ongoing rebound and post-recovery expansion in others. Latest available data for the year-to-date suggest reduced arrivals to Grenada, St. Lucia, Turks and Caicos Islands, The Bahamas, and Jamaica. However, arrivals to The Bahamas and Jamaica had already displayed signs of weakening in 2024, the latter partly attributed to an adverse US travel advisory, which was only upgraded in May 2025. Further, following a positive performance over the first four months of the year, arrivals to Cayman Islands and Belize declined in May and June limiting the outturn over the six-month period. Cruise tourism posted a slightly stronger performance, as arrivals to quite a few markets have not yet returned to pre-pandemic levels. Passenger arrivals to the region¹ climbed 6.7% y/y in Q1, led by visitors to The Bahamas, Turks and Caicos Islands and Barbados. However, arrivals to Jamaica, Aruba, Curaçao, and St. Lucia fell y/y during the quarter.

Exceptionally, the US announced an increase in its tariff on imports from Trinidad and Tobago from the new 10% baseline to 15%, igniting fears of reduced competitiveness, but revised downward the previously proposed 38% tariff on Guyana’s exports to 15%, following active local engagement with the US Trade Representative’s Office. The sluggish rebound of energy output has significantly dampened the pace the economic recovery in the twin-island republic, while shortages on the domestic FX market remain a challenge for the non-energy business sector. However, economic activity in Guyana continued to expand in Q1 2025, buttressed by increased oil production in tandem with booming non-energy output.

Regional inflation continued to soften in Q1 consistent with the general trend of international commodity prices, and the cycling out of idiosyncratic factors in a few markets. Average inflation² decelerated to 1.7% y/y in March 2025 from 2.7% y/y one year earlier, reflecting slower growth in all markets except Cayman Islands, St. Lucia, and Trinidad and Tobago, where rates still remained below 2%. Further, after tracking within the Bank of Jamaica’s (BOJ) 4% to 6% target range for nine consecutive months, Jamaica’s inflation rate fell below the range to 3.8% y/y in June 2025.

Growing economic activity boosted tax receipts contributing to improved fiscal positions in most markets. However, greater spending overshadowed an expansion in revenue collections in a few, including St. Vincent and the Grenadines and St. Lucia, while plummeting Citizenship by Investment (CBI) inflows – attributed to reforms to strengthen the programme and the setting of a regional minimum on pricing amid international scrutiny – led to a sizeable fiscal deficit in St. Kitts and Nevis. The Government of Trinidad and Tobago’s fiscal deficit also widened, reflecting a deterioration of the non-energy fiscal balance, despite an uptick in energy receipts.

FX reserves of most territories climbed and/or remained elevated over the most recent 12-month period. However, against the backdrop of tight local market liquidity, reserves in Trinidad and Tobago continued to trend lower, collapsing to less than half the level recorded a decade ago, representing 30 weeks of imports. Credit expansion in the region sustained a strong growth momentum over the 12 months to March 2025, contributing to improved loan quality across most markets, while more modest growth persisted for deposits. Banks’ capital adequacy ratios remained above minimum acceptable levels.

Despite relatively lower effective tariff rates, the world economy is still expected to soften under the weight of trade policy adjustments. In its July 2025 update to the World Economic Outlook (WEO), the IMF projects that global real GDP growth will slow to 3.0% in 2025, a 0.2 percentage point upgrade relative to its April 2025 outlook. Growth for the region’s largest trading partner, the US, has also been revised slightly upward (1 percentage point), now expected to slow to 1.9% in 2025. However, uncertainty remains extremely high due to the volatility of policy announcements. US trading partners unable to close deals by the August 1 cut-off date, will face the reinstatement of higher reciprocal tariffs though several have been revised relative to those first announced in April. Industry specific tariffs taken together with the latest round reciprocal tariff adjustments suggest US inflation could continue to trend upward, increasing the odds that the Fed continues to hold interest rates steady in 2025.

Economic activity in the Caribbean will likely continue to advance in 2025, albeit more slowly, while a modest pick-up in inflation is expected due to spillover effects of higher import prices. However, risks to the outlook remain high. A deeper-than-anticipated slowdown in key source markets could aggravate the weak year-to-date tourism performance in some territories, while the higher-than-baseline tariff imposed on Trinidad and Tobago could compound the challenges already facing the domestic business sector but is expected to have limited direct impact in Guyana due to exemptions for crude oil, bauxite and gold. Also, the US’ newly proposed 1% remittance tax as part of the One Big Beautiful Bill Act could pose further downside risk for territories like Jamaica which rely heavily on these inflows but will largely apply to cash-based transactions.