Islands' economic recovery to continue

By John Duchemin
Advertiser Staff Writer

After the turbulence, conflicts and uncertainty that dominated Hawai'i's economy this year, the outlook for 2003 is so normal it almost seems boring.

Slow job growth, minimal inflation, a mild rebound in tourism numbers, gently advancing incomes, and moderate unemployment are the predictions for the year ahead. Hawai'i's economic experts are unanimous in their belief that a gradual recovery is under way — one that will eventually alleviate the pain of the thousands of layoffs, business closures, and grave tourism difficulties that followed the 9/11 terrorist attacks.

"I don't think it's going to be that robust a snap back, but a continued recovery is what I'm expecting," said Leroy Laney, an economics and finance professor at Hawaii Pacific University and chief economic consultant to First Hawaiian Bank. "We have emerged from recession and are doing fairly well."

Growth rates of most key indicators are pegged between 1 percent and 3 percent for the coming year. Tourism is the exception, being expected to pop up about 6 percent as the previously depressed industry ramps back up to near-peak capacity.

The state still operates, however, under the shadow of global uncertainties. The war on terror, the prospect of war with Iraq, continued bad economic news from Japan, and a slow-growth U.S. economy, only recently recovered from a short recession: Each is likely to drag on air traffic, tourism spending and visitor counts in Hawai'i, economists say.

Economists say it's too early to predict the impact of a possible new Persian Gulf War, but they say it's already dampened tourism. To reflect the apparently increasing chances of conflict, forecasters have already decreased their visitor industry estimates for 2002.

Bank of Hawai'i economist Paul Brewbaker says the "Iraq anticipation effect" has kept hundreds of thousands of tourists at home; he's halved, to 4.7 percent, his estimate of 2003 visitor growth.

Still, economists said the uncertainties afflicting Hawai'i are less dramatic than immediately after 9/11, when many of the Islands' largest tourism businesses, like Aloha and Hawaiian airlines, DFS Hawaii, and many hotels, were teetering on the edge of unacceptable losses; cruise line American Classic Voyages was sinking; and about 11,000 employees were suddenly jobless.

Entering 2003, major tourism employers can at least take heart that tourism trends have returned to normal cycles, however dampened. The year of 2001 was the worst year in a decade, in terms of tourism arrivals; 2002, while still well down from the peak year of 2000, seems normal by comparison, particularly in recent months.

"There's still uncertainty, but it's a different kind of uncertainty," said Byron Gangnes, a University of Hawai'i economics professor and member of the UH Economic Research Organization. "It's far easier to tell about the economic aspects. Last year was very difficult to predict; (now) the scenario of recovery is pretty likely."

Adding to the mild optimism is the excellent performance of some non-tourism businesses in 2002, which helped to sustain the overall economy through the visitor industry's worst suffering. Thanks to the Federal Reserve Board's repeated short-term interest rate cuts, which in turn have stimulated drops in long-term rates, the cost of borrowing has plummeted. In Hawai'i, mortgage rates have dropped more than 2 percentage points in two years.

That drop has caused many people to renegotiate home loans — and fueled a rebound in home prices, thereby increasing both homeowners' wealth and their ability to sustain debts.

Meanwhile, construction of new homes and business properties has increased. Building permits have boomed, particularly on the Neighbor Islands, and the construction industry has added hundreds of jobs.

Meanwhile, the financial and real estate sectors have benefited from the flurry of loan renegotiations, as indicated by improved profits at many local banks and the first sustained increase in finance, insurance and real estate jobs since the mid-1990s.

For 2003, interest rates are not expected to rise dramatically and the real estate market is expected to continue its upward trend — though perhaps not at the torrid pace of 2002, Hawai'i economists said. Interest rates are expected to bottom out.

But, says Pearl Imada-Iboshi, economic research director at the state Department of Business, Economic Development and Tourism, the surprising strengths of these sectors this year helped contain the economic downturn of 2001 and 2002 primarily to the tourism sector.