Delayed US Recession Still Set To Throw Puerto Rican Economy Into Contraction In FY24

• Fitch Solutions is maintaining its FY24 real GNP forecast for Puerto Rico of a 0.6% contraction; however, it has revised Puerto Rico’s FY23 growth estimate from 0.5% to 1.0%.
• The Junta de Planificacion has published preliminary FY22 (July 2021 – June 2022) GNP data which came in at 3.7% growth, higher than Fitch’s estimate of 2.1%. This reflected stronger than expected private consumption (8.5%) and fixed investment (35.5%) growth, the latter supported by financial capital inflows from the US federal government.
• This has contributed to the upward revision of the 2023 estimate as Fitch believes that US financial flows will continue to contribute to the Puerto Rican industrial manufacturing sector, as well as the construction industry.
• Additionally, due to evolving expectations of a US economic recession starting in late 2023 or early 2024, Fitch expects weaker US demand in the latter half of FY24 will translate into headwinds for Puerto Rican exports and private consumption, while elevated interest rates will weigh on gross fixed capital formation.
• Risks to the growth outlook are balanced by the threat of a severe weather event through H223 and the rising likelihood of the US ‘soft landing’ in H124. The Fed has signalled that it may decide to shift its monetary policy stance, even if it does not see a significant uptick in unemployment, as long as the headline and core inflation start to moderate in the coming months. If this plays out, interest rates come down faster than expected and lower unemployment materializes in early 2024, which would support demand for Puerto Rican goods and tourism exports.

(Source: Fitch Solutions)