Even as an economic downturn looms on the horizon, a University of Hawaii Economic Research Organization report predicts that the state will dodge an economic recession, if only barely.
UHERO Executive Director Carl Bonham said during a livestreamed interview Friday that Hawaii’s economy is “out of sync” and lags behind that of the U.S. mainland.
But while that means the state’s recovery from the COVID-19 pandemic has been slower than that of the mainland, it also means that it likely will avoid the worst impacts of an economic downturn, thanks in large part to the tourism industry.
“Hawaii is feeling the effects of the national economic challenges,” according to the report, which was released on Friday. “Higher mortgage rates are battering the housing market and inflation is undercutting household purchasing power. But the ongoing recovery of international travel — particularly from Japan — will provide support for tourism as the mainland market softens in 2023.”
Visitor counts to Hawaii have risen to about 93% of prepandemic levels, UHERO reported, and that is before a full return of Japanese visitors, who have been slow to resume travel to the state. The number of Japanese visitors is still down about 75% from prior to the pandemic.
Because of a nearly 30% decline in the Japanese yen this year, UHERO expects the Japanese market might take even longer to recover. Bonham said it could reach about half of prepandemic levels by the third quarter of 2023.
But, regardless of their country of origin, visitors’ money doesn’t go as far these days. Prices for hotels and car rentals are up 20% to 30%, reducing the amount visitors can spend on shopping and dining. And as economic conditions on the mainland worsen, the number of mainland visitors will decrease, the report said.
Bonham, however, offered a potential scenario in which the recovery of the Japanese visitor market dovetails with mainland U.S. visitor rates declining, preventing a more significant overall drop in tourism.
Meanwhile, wages have risen — which UHERO said will maintain upward pressure on prices — but at a lower rate than inflation, meaning that a worker’s purchasing power has decreased. And the high interest rates imposed by the U.S. Federal Reserve to curb inflation mean that homes are now less affordable even as home prices fall.
Bonham said he predicts an approximately 10% decline in single-family home prices over 2023, but added that the pressures driving that decline — interest rates pricing out people who could have otherwise afforded a new home and a decline in housing demand created by people moving to Hawaii for remote work — are different from those that fueled the housing crash in 2008.
UHERO predicted that work on new housing developments could be delayed or cancelled outright now that high interest and mortgage rates mean that developers cannot easily recoup the costs of setting aside units for state-mandated affordable housing, which will itself reduce the amount of housing available in the future.
According to the report, inflation in Hawaii is just under 7%, which is still lower than the U.S. average, and UHERO estimates that the rate of inflation is beginning to slow, and could drop to about 2.5%, just above the long-term average, by 2024.
“We’re already seeing falling prices,” Bonham said. “Rent prices have fallen the last two months … used car prices have fallen the last six months. I think a year from now, we’re going to be looking back and thinking that things have really changed.”
Ultimately, UHERO predicts that economic growth in Hawaii will all but stall completely in 2023, but will not decline, unlike the U.S. mainland. Most new jobs that will open next year will be in tourism-dependent sectors such as accommodation, while nearly all other industries will still lag behind prepandemic levels.
“The best case scenario has inflation coming down really rapidly and the Fed not raising rates as high as they think they’re going to, and in that case the U.S. economy could avoid a recession outright,” Bonham said. “And there are worst-case scenarios where inflation is much more intransigent, it’s hard to bring it down, rates go up higher, and we get a deeper U.S. recession.”
How quickly the state can recover from the downturn is almost entirely dependent on external factors: how fast the Federal Reserve can get inflation under control, whether China can control its current spike in COVID cases, whether Europe can reduce its dependency on Russian energy, and more.
“While we can hope that things go right and worry they could go wrong, we continue to see the middle ground as most likely,” the report concluded. “Hawaii skates along the growth edge in 2023, slowing, but avoiding a local recession.”
Email Michael Brestovansky at mbrestovansky@hawaiitribune-herald.com.
