The World Bank has just reported that the coronavirus epidemic has caused a “global shock” and that “significant economic pain seems unavoidable in all countries.”
In Puerto Rico, the economic cost has already been seen in several sectors, as the number of unemployment claims has jumped in the past few weeks. Since March 16, the local Labor Department has received more than 98,000 unemployment claims—an estimated 22,250 claims were filed between March 21 and 24.
The island is in the midst of a month-long lockdown and curfew. As a result, economic activity has ground to a virtual halt in Puerto Rico, as with many other jurisdictions. Passenger activity at the Luis Muñoz Marín (LMM) International Airport, the island’s main passenger terminal that is open during the coronavirus crisis, has seen a drop of more than 85 percent, according to Aerostar, the company that manages the airport.
Many hotels, retailers, restaurants and other small businesses have laid off their staff. Among the big companies with a presence in Puerto Rico that have laid off or furloughed their employees are Marriott International, the world’s largest hotel chain; Hyatt and Hilton hotels; major retailers Macy’s and Gap; and restaurant chain The Cheesecake Factory, to name a few.
A local startup, Abexus Analytics, has recently published a study of the economic impact of the novel coronavirus COVID-19 in Puerto Rico, providing two scenarios based on the islandwide lockdown and curfew imposed by the central government. When the document, dubbed “Economic Impact of COVID-19 in Puerto Rico: A Chain Reaction that Ripples Through the Business Community,” was being prepared, the lockdown and curfew was supposed to last two weeks, but the restrictions have since been extended to one month.
It should be noted that the estimates by Abexus Analytics also do not include the impact of the Puerto Rico government’s stimulus package and the $2.2. trillion coronavirus rescue package that was recently passed by the U.S. Congress and signed into law by President Trump.
“The pause in the economy is strongly felt in the services sector, particularly, non-salaried workers and small and medium businesses,” states the 10-page document. “Readers must consider that the biggest hit to the economy- right now- is loss of income due to the artificially-created temporary layoffs, as a consequence of the government’s countermeasures.”
Although the current order is only for two weeks, its economic effects would extend for several months, according to the study. Without taking into account the newly proposed stimulus measures [by the Puerto Rico government], the scenarios point to a total of $4 billion in economic losses if the most acute effects were for one month, and almost $10 billion if they were for three months. This could represent a reduction of between -1.7 percent and -4.1 percent of Puerto Rico’s gross national product (GNP).
A business source of THE WEEKLY JOURNAL said the study’s numbers seemed “aggressive” and did not take into account the impact on consumption, along with the stimulus packages announced by the Puerto Rico and federal governments. The source also found it difficult to replicate the study’s methodology.
“The economic simulations were performed with the information available at the time of publication… We recognize that in the coming weeks, information will continue to emerge that will help us to be even more detailed in our assumptions. Therefore, we will be updating our impacts as new data emerge,” said Adrián Alós, an economist and CEO of Abexus Analytics.
Two scenarios at play
In scenario A, the local economy would receive a drastic shock during the first month of the lockdown and curfew, losing between $2.93 billion in the best-case scenario and $3.96 billion in the worst-case scenario. The extended impact on the local economy would be a medium-term effect of five months.
Under this scenario, the island’s GNP would drop by 1.7 percent during the six-month period.
Scenario B estimates an even bigger shock to Puerto Rico’s economy of between $3.68 billion and $10.14 billion during the first three months. The extended impact on the local economy would be for a much longer period of one year.
Under this scenario, the island’s GNP would drop by 4.1 percent during the 12-month period.
“Part of our job, as a technology company, is to bridge the gap between information produced by companies and the economy in general, which is why our systems go beyond generic estimates, but seek to speak the language of the business world based on the science of data and not necessarily depend on the anecdotal opinion of specialists,” said Eduardo Burgos Suazo, chief operating official at Abexus Analytics.
Wage and tourism losses
The report also highlights what wage losses could be for workers in Puerto Rico for each week of business interruption. In just a couple of weeks, such losses could increase to about $511.4 million. Wage losses would vary from $2.4 billion to $3 billion in scenario A and $5.9 billion to $7.4 billion in scenario B.
Additionally, the report provides details on the estimated economic losses for the tourism industry, which has been severely affected by the coronavirus crisis.
Tourism would suffer a “profound shock,” with losses varying from $524 million to $971 million under scenario A, and $820 million to $2.74 billion in losses under scenario B.
“We all know there are strong economic effects associated with the countermeasures taken to control the spread of the virus. The question right now is how long the effects are going to last. In the economy, this is usually called uncertainty. Once uncertainty skyrockets, economic actors start to walk back as if they were performing MJ’s [Michael Jackson’s] moonwalk,” states the report. “This causes both consumers and investors to hold up their investment or consumption decisions. Moreover, several small and large businesses will not be able to recuperate or sustain the economic hardship.”
The domino impact is also a factor, which is quite evident in the tourism sector. If visitors are not coming, as evidenced by the steep drop in passenger arrivals at LMM Airport, hotels and small inns will be empty, affecting jobs. This is also true of other sectors. “For instance, if the main supplier of a pool cleaner closes, then the pool cleaner and most of its colleagues will also suffer a strong business interruption,” states the report.
“You will start to hear the words ‘supply-chain’ very so often, particularly due to China’s role in the global economy. Previous experiences have shown us that companies are able to find similar substitutes in the market, the question is, however, if such substitutes will be available this time,” adds the report.
Abexus Analytics provides general information on its methodology, saying it used algorithms, economic theory and data analytic techniques to reach its conclusions. It also categorized the economy into 20 industries that include construction, manufacturing, retail trade and accommodation and food services.
“The results are then modeled with the typical inter-industry relationships (using the 2007 Planning Board Economic Multipliers). For example, if we assume a loss of 50 percent in construction wages during the first month, then we must look for which areas of the economy support such industry, since their inputs, as well as their expenditures, will suffer a downward effect,” states the report. “Once we have the aggregate results, the dollar value is deflated and compared with the rest of the economy. The economic impact was estimated in nominal amounts and in terms of real GNP.”