The indication by members of Gov. Alejandro García-Padilla’s administration of a slight economic recovery over the past two fiscal years is “simply a mirage,” and it will take significant adjustments to achieve the growth predicted for coming years, economist firm H. Calero Consulting Group Inc. said in its most recent monthly publication.
“Has the Puerto Rico economy recovered from its protracted economic recession? This is a hot-button issue and the answer is: Not yet,” said the firm in its “Economic Pulse” publication.
“So far, Fiscal 2014 has been another tough year. General Obligation bonds were downgraded to below investment grade. Many Puerto Ricans have experienced a significant loss of wealth since 2005. Unemployment and fiscal revenues have been disappointing,” the publication stated. “Hence, we conclude the Puerto Rico Planning Board’s mild recovery of real economic growth in Fiscal 2012 and 2013 is simply a mirage.”
While the island’s conditions are challenging, so are those of the major world economies — political turmoil and conflicts are the order of the day in parts of Europe, while oil prices remain stuck at high levels, which could somehow influence Puerto Rico’s progress. And although the U.S. economy seems to be improving, it is not certain that the island could benefit from the turnaround.
“The U.S. economy is back on track and likely to remain healthy over the next four years. The sustained recovery in the mainland might lead some to think that Puerto Rico will immediately benefit from this, but this is not exactly the case,” the April edition of the publication said.
Part of the explanation that the firm offers is that despite the fact that the island benefits from an influx of federal transfers, they have had a slight effect on the economy.
“This explains why, despite mainland recovery, Puerto Rico is still trapped in a protracted slump. The real rates of growth of Puerto Rico and the U.S. are indeed separating,” the publication noted.
Nothing but a mirage
In fiscal 2013, the local economy posted slight growth of 0.3 percent, below the 0.9 percent growth in 2012. This came after five consecutive years of negative growth.
“The performance of 2012 and 2013 was a mirage rather than a solid turnaround. A final thrust in public construction during election year 2012 and another boost in private consumption, driven by massive inflows of federal funds, carried the economy over these past two years,” the economist firm noted.
But despite of the “anemic economy,” consumers have managed to pull through these adverse times, recording real personal consumption growth of 2.4 percent in fiscal 2013, mostly driven by a boost in durable goods. Personal consumption went unscathed during the former Gov. Luis Fortuño administration, with an overall real change of 7.8 percent during 2009-2013 term
“However, the core of the real economy remains feeble. In fiscal 2013, PR lost another 6,000 jobs relative to 2012. More than 125,000 jobs have disappeared since fiscal 2005,” the publication noted. “Were it not for the gains in health care and education, both funded with federal resources, the job situation would be more critical.”
The endless fiscal mess
Key economic indicators — jobs, construction, exports, tourism — have and continue lagging, making the island’s fiscal woes seem “endless,” the publication noted.
Those problems, coupled with the downgrade of the Commonwealth’s bonds, pose significant challenges for an economy fighting to balance its fiscal budget in 2015. Not even the $3 billion bond issue in March will suffice, the economic firm said.
“The Government has gained some time, a temporary relief, but it is far from a real solution to the fiscal mess. Unlike the past administration, this time the central government has no other choice but to slash government spending in the upcoming proposed budget,” it said.
In fiscal 2015, the consolidated budget will include substantial cuts in the central government spending, and has been pegged at $28.1 billion for Fiscal 2015, down from the $29 billion for Fiscal 2014.
“The proposed budget scissors will not only entail less money in consumers’ pockets but also a substantial reduction in investment for growth unless the private sector steps up to the plate and covers this significant shortfall in government spending with new investment. These are the two blades of the proposed budget scissors,” the firm noted.
“There are no magic solutions to jumpstart this economy. The bitter truth is that, unless external investment becomes available, proposed budget cuts will aggravate the continued recession of this economy. In the end, we might not prevent the government from running another deficit,” it continued.
Returning to recession
H. Calero Consulting’s forecast for 2014-2016 call for negative growth, as opposed to what the Puerto Rico Planning Board has predicted, which will be an increase of 0.2 percent in Fiscal 2015.
During fiscal 2014, the firm’s economic model predicts a base scenario of negative growth of –0.8 percent and a pessimistic scenario of –1.5 percent.
“Our forecast is based on a combination of facts and base line assumptions. First, given the budget cuts in both, Puerto Rico and the U.S., real government spending in Puerto Rico will contract by –1.1 percent,” the publication stated. “We forecast continued, albeit meager negative growth of –1.5 percent in 2015 and potential positive growth of 1.0 percent in 2016. The reduction in government spending is one of the factors supporting our negative forecast for 2015.”
A jump in investment is expected to drive a small rebound in 2016.
“Foreign investors and firms are not scared. They trust Puerto Rico. It is time to set aside the irrational fight the erodes our ability to launch an aggressive plan of economic development,” H. Calero Consulting said. “Without a solid economic turnaround, the government will fail to balance its budget. Moreover, a credible plan for an economic comeback will place Puerto Rico in a stronger position to negotiate with debtors.”