UHERO: Inflation will hinder Hawaiʻi’s economic growth in 2023

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While uncertainty has increased since its last report in September, the University of Hawai‘i Economic Research Organization, or UHERO, says the prospects for Hawai‘i remain largely unchanged as the global economic outlook continues to darken.

Image courtesy of the University of Hawai‘i Economic Research Organization.

Rising interest rates, dwindling COVID-19 pandemic era savings and a coming U.S. downturn will cause a pause in growth next year for the state, according to a new forecast from UHERO. The belated recovery of the Japanese visitor market and surging public sector construction, however, are expected to be the keys to preventing a recession in the islands.

A best case scenario would see rapid decline in U.S. inflation, allowing an early interest rate retreat. If inflation proves intractable, the Fed will raise rates higher and longer. A stepped-up Ukraine War and greater COVID challenges in China could further worsen global conditions.

Poorer external and local demand might then precipitate an outright contraction in Hawai’i, but even in that case, a severe downturn remains unlikely.


Here are additional highlights from the Dec. 16 report:

  • The global outlook continues to deteriorate. Persistent high inflation is driving aggressive interest rate hikes, slowing growth. Energy constraints from Russia’s war in Ukraine are sending Europe into recession. While supply chain woes have receded, China’s COVID struggles threaten further disruptions. The weak yen is weighing on Japanese consumer spending, including on vacations in Hawaiʻi.
  • The sharp rise in interest rates is battering the U.S. housing market. Transient factors that contributed to high inflation have eased, and core inflation will trend lower. While the labor market remains tight, job growth is easing and signs of broader economic slowing are emerging. The U.S. economy will enter a mild recession by mid-2023.
  • Mixed control of U.S. Congress following the midterm elections will mean no major policy changes. The biggest risk is of temporary government shutdowns resulting from disputes about budget extensions and the federal debt ceiling.
  • By some measures, Hawaiʻi visitor numbers have recovered to pre-pandemic levels. The return of visitors from Japan, which has been hindered by the late removal of travel restrictions and the weak yen, will offset a pullback of mainland arrivals next year. Rising room rates in Hawaiʻi have stabilized, even as occupancy remains below 2019 levels.
  • Hawaiʻi inflation remains high, if lower than for the U.S. overall. Rising housing costs have yet to feed through fully, but the slowing of rent appreciation will bring relief. Together with declining energy and food costs, this will allow inflation to ease to less than 4% in 2023, cooling to roughly 2.5% by 2024.
  • Hawaiʻi’s labor market is not as tight as the mainland’s, with employment in some sectors still below their pre-COVID levels. Still, excess demand for workers is driving up wages even as inflation undercuts the purchasing power of income. Pandemic school closures and abundant employment opportunities reduced the rate of college enrollment, particularly among lower-income students. This will reduce future earnings and widen inequality.
  • The drag from high prices and interest rates, coupled with the U.S. recession, will cause a pause in job growth next year and an uptick in unemployment before growth resumes in 2024. Inflation-adjusted income will rise just 1% in 2023, but improve to about 2% thereafter.
  • Housing affordability has taken a big hit from soaring mortgage interest rates. As a result, home prices have begun to fall. Reduced affordability will increase the cost of developments with affordable unit requirements, likely resulting in some project delays or cancellations. Permitting delays also add to development costs. Large federal contracts and new hotel projects will support the construction sector more than offsetting softer residential buildings.

For more about the 2023 economic forecast for the state, click here.


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