Vaccines offer the key to speed of Hawaii’s economic recovery

It’s going to be more pain before a meaningful gain for Hawaii’s economy.

The state’s recovery is not expected to pick up in earnest until the middle of next year, according to the University of Hawaii Economic Research Organization’s annual Hawaii forecast due out today.

The UHERO report says vaccines offer a promise of growth in 2021 but that epidemiological and economic uncertainty could lead to three different recovery scenarios for the next three years.

“The welcome news about coming vaccines fundamentally improves growth prospects for the second half of 2021, but making it to the point when the virus is no longer a threat will be painful and costly,” said the report, which was spearheaded by UH professor Carl Bonham. “As in our third quarter report, our baseline forecast sees meaningful economic recovery delayed until the middle of next year. After that, we anticipate an attenuated recovery process, albeit at a somewhat faster pace than in our previous forecasts.”

Tourism, the lifeblood of the state, is projected to begin recovering with visitor arrivals snapping back sharply next year and in 2022 before moderating in 2023, according to UHERO’s base-line scenario. Visitors arriving by air are forecast to end this year down 74.3% at 2.7 million before jumping 65.4% to 4.4 million in 2021 and 84.9% to 8.2 million in 2022. The 11.4% increase in 2023 to 9.1 million still will leave the state more than a million behind its 2019 rec-ord of 10.4 million.

By contrast, the economic forecast last week by the state Department of Business, Economic Development and Tourism was more optimistic for next year. DBEDT’s 2021 forecast projected visitor arrivals, which include cruise ship passengers in its report, to more than double next year to 6.2 million.

UHERO’s optimistic scenario shows visitor arrivals hitting 5.9 million next year, while its pessimistic scenario projects arrivals reaching just 2.8 million in 2021.

“Under an optimistic scenario, earlier widespread availability of vaccines and rapid virus tests would enable an earlier recovery in visitor numbers,” UHERO said. “Even in this case, we would not approach 2017 levels of activity during our five-year forecast horizon.

“In a more pessimistic scenario, the surge in COVID-19 cases nationally would lead to test shortages that combine with Hawaii’s tightened quarantine rules to cause a several- month setback for tourism and overall economic recovery. After a pause lasting through March, a significant restart of tourism would be delayed until late next year, and the long-term path of recovery would be slower than in the baseline case.”

UHERO sees a very weak December for travel and tourism in its base-line visitor industry forecast.

”We think it is likely that the severity of the mainland surge will cause many travelers to delay Hawaii vacation plans because of increased perceived travel risk, concerns about possible travel disruption, and greater difficulty obtaining pre-travel tests,” UHERO said.

The report’s economic researchers also said the recent surge in California, the state’s most important market, is especially worrisome and that Kauai’s exit from the Safe Travels pre-travel testing program will lead to very low numbers of travelers to that island.

“With a very weak December, the fourth quarter of this year will see arrivals averaging just one-sixth of their level a year earlier, rising only a bit further by the first quarter of 2021,” UHERO said.

UHERO said near-term weakness will limit the state’s 2021 growth and set the stage for possibly a further decline. The researchers said Hawaii’s inflation-adjusted economic growth, as measured by the gross domestic product, is seen falling 10.2% this year, inching up 0.1% in 2021 and then growing by 5.2% in 2022 and 2.1% in 2023.

Even though Hawaii’s COVID-19 case numbers have been among the lowest in the country throughout much of the pandemic, the impact on the state’s businesses has been dire because of the dependence on tourism.

”A large number of businesses have been shuttered,” UHERO wrote. “While many remain hopeful about future reopening, others have been forced to close their doors permanently, resulting in a steady rise in business failures.”

UHERO noted that a Yelp study found that Honolulu is leading the nation with roughly 11 permanently closed businesses and 16 temporarily closed businesses per 1,000 establishments.

”If one can extrapolate this to the nearly 130,000 small businesses across the state, it would mean that approximately 1,400 Hawaii businesses have closed permanently and more than 2,000 small businesses have closed temporarily,” UHERO said.

Hawaii’s unemployment rate was the highest in the nation at 14.3% in October as laid-off and furloughed workers were slow to return to their jobs. The accommodation and food services sector was down nearly 40% through the first 10 months of the year.

Nonfarm payroll jobs are projected to finish this year down 13.2% and then edge up just 1% in 2021, with gains of 7.2% and 2% in 2022 and 2023.

“Since a large fraction of Hawaii’s labor force relies on tourism, Hawaii’s recovery to pre-COVID-19 levels of employment will take longer than in many other states,” UHERO said.