Tag: Puerto Rico Compass

Puerto Rico’s economy continues immersed in a recession that began in 2006 and continues today with high unemployment, low workforce participation, a declining population, and challenges facing its key pharmaceutical sector. At the start of 2013, Puerto Rico had a new Governor with hopes of a long-awaited change in all branches of the PR Government and the Island economy. As of 4Q 2013 and despite great efforts to spur the economy and reduce the central government’s fiscal deficit, the situation remains challenging and requires a commitment to action both from the public as well as the private sector. As the year ended, Moody’s announced it had a negative outlook on PR’s GO bonds and its decision to downgrade to speculative (junk) status would be revisited within 90 days. As of February 2014, all three rating agencies had downgraded PR”s GOs. An analysis of 4Q 2013 quarterly indices signals it is time to be creative regarding solutions to the economic and fiscal crisis.

Even if the PR economy is only going through a transition, it is an extremely painful one for many. Employment trends have polarized the workforce and hollowed out the middle class. Poor job growth is still the result of a sluggish economy. Will the pressure on employment and the resulting inequality only get worse? As this issue of Compass reveals, economic fundamentals still continue to underperform after 7 years of economic recession. Many worry that even with robust demand, the construction sector will continue to struggle with underutilized capacity. Manufacturing is barely holding. We continue to expect a weak economy, burdened by the collection of new taxes. Consumer confidence is weak as rising gasoline, electricity, and water prices pull future spending to lower levels. While the banking index is not back to pre-recession levels, the recent gain is positive. Growth is likely to still lag behind most previous recoveries.

Puerto Rico has a long way to go before it can truly be considered a post recession economy. This Compass analyzes PR’s current economic conditions compared to precession levels in Q1 2006. The island economy is still fragile. The new administration in “La Fortaleza” faces daunting challenges and tough decisions to walk the fine line between fiscal discipline and economic growth. Credit rating agencies, bondholders, and the general public want to see quick results but that is not possible when the problems have remained unsolved for many years. The local fiscal year budget is due on June 30 and the current government has to choose between restrictive fiscal policies (more taxes, less spending) or try to restore growth thru expansive measures (fewer taxes, more spending) or a reasonable combination of both.

Government, both federal and local, recognized the importance of the financial system. Trillions of federal funds have been directed to financial bailout programs. Since the onset of the Great Recession in the US, we have increasingly heard that the financial system was one of the main causes of the crisis. Indeed, the financial sector plays a determinant role in economic growth. This also applies in Puerto Rico, which currently has 11 commercial banks. How do these banks impact the island economy? What has been their response to the ongoing 6-year recession? What are the main drivers of bank behavior? In response, what does the economy need from banks? After all, their lending activity impacts both consumer as well as business sectors. This Compass discusses some of these questions.

With elections just around the corner, contenders are doing their best to convince voters that they have the solution for all economic issues. Promises of job creation, economic growth, and fiscal balance are everyday fare. However, economic reality is different from these political ads. None of our 6 quarterly economic indices has returned to pre-recession levels. Real GNP is 11% below FY 2006. Unemployment in September 2012 was 3.4% higher than in 2005 and the employment rate was at its lowest in three decades. Whoever wins the election will face a Herculean task of first, returning to pre-recession levels and then, recover the path to growth. Q3 results in 2012 still reveal that Puerto Rico continues to strive for growth but has yet to go some distance in order to regain even pre-recession levels of 2006. The road back to normality will require some structural changes and a vision of growth for the Island.

The financial crisis and associated recession originated in the US in early 2008 and its subsequent spread to Europe engulfed most of the economies in both the developed as well as the developing world. US and Europe still experience problems of high unemployment and slow economic growth. In July, the International Monetary Fund lowered its 2012 US real growth estimate to 2% from April’s 2.1%. How does this impact our economy? Puerto Rico is a regional economy of the US. Despite current public policies of fiscal austerity, increased public debt, and efforts to privatize major infrastructure facilities, the reality remains that Puerto Rico is highly integrated with the US economy (71% of PR’s exports got to the US). Without structural changes, Puerto Rico will continue to suffer the effects not only of a slow US growing economy but also of an internally slow growing economy. This issue focuses on the impact of external factors and current policies on a very open economy such as ours.

Since 2009, Puerto Rico has attempted to regain fiscal sustainability and market confidence. We have been staring into the headlights of a protracted economic recession without gradually realigning our economy to a sustainable position of economic growth. Despite high levels of unemployment and bankruptcies, there are signs that consumption may be coming back. Consumer expenditures run at about 90% of GNP in Puerto Rico, so consumption growth will play an important part in determining the pace of PR growth. This issue presents an analysis of HCCG’s economic indices for the first quarter 2012, with particular emphasis on consumption. Has consumption recovered to pre-recession levels of 2006? How have different components of consumption performed? How long is the path to complete recovery? Also, find out how other indicators, such as construction, have also posted positive growth during this quarter.

Nowadays, recovery is the most wanted outcome in the US and PR. Usually, signs of early growth show up in consumer spending, housing, and construction. This time around, these sectors have been the last to recover in the US. Instead, the US economy is showing signs of recovery on the production side. Manufacturing and business investment have led the way, driving down the unemployment rate. For some economists, that improvement may finally lead to improved consumer spending in the US. The relevant question for us is whether PR shows signs of a production side recovery or if trends in consumer spending, housing, and construction in the island speak of a consumer side recovery? HCCG’s indices for the 4thQ can provide some answers and chart the performance of CY 2011.

Puerto Rico’s third quarter indices reveal a mixed picture. The economy is not yet out of recession but there are some positive signs. However, there are already rumors of another recession brewing in the US as a result of the unresolved debt hangover in Europe and its efforts to save Greece and the continent’s debt-burdened banks. Still, the idea that the island has hit bottom is a possibility but, as we have indicated in prior issues of Compass, this will depend not only on internal but also on external factors originating in the US and other global economies. There is increasing dissatisfaction with escalating electricity prices and persistently high unemployment. This issue tracks the 3Q of the PR economy and highlights some trends.