Tuesday, April 23, 2013

Reasons to be (modestly) optimistic about Guam's economy

I am cautiously optimistic about how Guam's economy will fare over the next few years. First, a recap of where I believe we are, then I shall discuss some reasons for thinking positive and finish off by taking the punchbowl away.

I believe it is evident that Guam's economy has been depressed for quite a while (to say the least). In recent years, the inflation rate has been declining. This and the persistently high unemployment rate make me believe that there has been a sustained output gap.

There are a number of reasons to believe things may get better:

(1) as per my last post, the indicators I cited may portend that the US (and presumably Guam) are headed toward a recovery, which I largely credit to the Fed's more credible statements of future policy.

(2) every cloud has a silver lining (lol). I believe that policy-makers in Washington, DC, may significantly increase non-buildup-related spending on military forces on Guam because of the perceived threat of North Korea.

(3) the government of Japan has undertaken a bold new monetary policy, which I believe can "deliver the goods." The plan is to attain a 2% inflation rate. As Joe Bradley (chief economist of the Bank of Guam) has implied, the yen-dollar exchange rate "sweet spot" is about 110 yen per dollar. At about 99 yen per dollar, it would take a 10% devaluation of the yen to reach 110, so we have a way to go before a yen devaluation would hurt Guam's economy. In fact, I ran a simple regression that showed that in recent history, a weaker yen usually is a positive for tourist arrival numbers from Japan to Guam.

Okay. That's pretty positive, but now for the cold water:

(1) sequestration will hurt Guam's economy.

And

(2) fiscal consolidation tends to hurt growth in the short-run, when it is not counteracted by monetary policy.

These effects in both directions might leave the net effect indeterminate, but I think there is more reason to be optimistic than pessimistic given these conditions. I hope I'm right about that.

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