Puerto Rico economy: Officially depressed

Publicado por el ECONOMIST INTELLIGENCE UNIT de la revista internacional The Economist el 10 de noviembre de 2009

Puerto Rico’s economy, which has been contracting steadily since the fiscal year 2006/07, remains extremely weak despite a modest improvement in global economic conditions in recent months. The ongoing recession is the worst in the country’s history, and following an officially estimated 5.5% decline in real GNP in the fiscal year 2008/09, the government is officially calling it a depression—defined as a decline in economic activity lasting at least three years).

The latest economic data indicate that conditions remained poor in the first half of 2009. The decline in construction activity continued to deepen in the first half of 2009, underscored by a 30% year-on-year decline in the number of construction permits approved. Following a 3% year-on-year decline in the first quarter of 2009, retail sales were down by 3.3% in May, mainly reflecting weaker sales of motor vehicles. Moreover, tourism data show that there was a 4.8% decline in the number of registered hotel guests during the second quarter of 2009. In the first half of 2009 consumption of electricity fell by 5.6%, indicating severe weaknesses in the overall economy.

The jobless rate has also continued to trend upwards. According to a US Department of Labour survey, employment declined by 2.4% in the first quarter of 2009 and 4.1% in the second quarter. In the five months between March and July 2009 a total of 23,000 non-farm jobs were lost. After dropping slightly in May to 14.3%, the unemployment rate rose to 15% in August, a 30% increase from a year earlier (51,000 people) and the highest unemployment rate in the US.

No light in the tunnel yet
Following a GNP contraction of 5.5% in the 2008/09 July-June fiscal year, the recession is forecast to continue through the next two years. The Economist Intelligence Unit foresees a real GNP contracting of 3% in 2009/10 (July-June) and of 3.5% in 2010/11.

Economic activity will remain very weak in the remainder of the 2009/10 fiscal year, owing to a continued rise in unemployment which will further weaken domestic demand; investment will remain weak on account of continued tight credit conditions. We expect that the recession will tail off in calendar year 2010, on the assumption that US economic growth begins to recover, that the US$6bn in US stimulus money is effective in boosting economic activity within Puerto Rico, and that cuts in interest rates help to boost consumer spending. However, this forecast is subject to downside risks, given the possibility of a weaker than forecast stimulus impact and the possibility that higher inflation (owing to rising oil prices) further undermines private consumption.

A pick-up in external demand will also be necessary to buoy the recovery. Still, investment from US-based pharmaceutical companies, which have a major presence in Puerto Rico, will suffer from slow growth on the US mainland, and, more importantly, the looming expiration of patents on several of the major pharmaceutical products manufactured on the island. High-tech exports, which have risen every year since 2002 and reached US$3bn in 2007, could therefore suffer in 2010-11, resulting in an even steeper contraction of real GNP growth than we currently forecast.

Assuming that there is no second fiscal stimulus package in the US and that the Federal Reserve (the Fed, the US central bank) begins to tighten monetary policy in the second half of 2010, we expect US GDP growth to weaken to 1.3% in 2011. The weak outlook for the US will hinder Puerto Rico’s recovery, as investment and exports will be hard hit. As a result, we expect Puerto Rico’s GNP to contract by a further 3.5% in fiscal year 2010/11.



You must be logged in to post a comment.