The Hawaii economy hangs in the balance for 2023.

Toward the end of 2022, the Department of Business, Economic Development and Tourism predicted a rosy outlook for this year. The “rainy day fund” is flush with cash, and the new gubernatorial administration inherited a hefty budget surplus already allocated to priority issues such as affordable housing and climate change.

However, the financial tailwinds are the result of enormous federal spending to combat ill winds of COVID-19 and to make progress on health care, infrastructure, school loans and other worthy programs. Notwithstanding good intentions, federal spending has resulted in mounting national debt and rampant inflation.

The total U.S. gross domestic product is expected to reach $21.5 billion by the end of 2023, while the U.S. government debt is currently $31.5 billion, or 147% of GDP. The injection of funds combined with supply chain challenges, oil constraints, labor shortages and increased wages caused inflation to peak at 9.1% in June.

Increases to the federal funds rate from 0.00-0.25% until March 17 to 4.25-4.50% on Dec. 14 helped drop inflation to 6.5% in December. But the federal target rate for inflation is historically far lower at 2%. The current forecast is that the Federal Reserve Board will continue to increase rates at a slower rate during at least part of 2023. The policymakers will announced their latest decision today.

Also problematic in 2022 were the other two global economic engines. Europe, without Russian oil, has been deeply concerned about the cost and access to energy in order to keep warm during the winter. China’s property market bubble popped in 2022, and a quarter-billion Chinese developed COVID-19. Chinese GDP dropped to a nearly unprecedented 2.9% in the fourth quarter. This, combined with a reasonably warm winter in Europe, took some pressure off energy demand. At the same time, the lifting of COVID-19 lockdowns in China has begun to enable the economy to pick up once again.

The biggest question of the day is whether the U.S. will enter a recession in the next few months and, if so, how bad and for how long. To be clear, there has never been a soft landing when inflation started out so high. The fact that the other two global engines are looking a little better might help mitigate recession prospects.

Turning to Hawaii, economic prospects for 2023 are also mixed. Tourism did see a large rebound as COVID-19 began to settle, but mostly owing to the U.S., especially West Coast markets. Much of this is from pent-up demand that is settling down. What is not helping is persistent lows in the Japanese, Canadian and other foreign markets owing also in part to the very strong dollar.

The gubernatorial proposal to increase fees to visitors utilizing our precious natural sites and resources will help. However, tourism is broadly in transition. The recent plan put forth by the Hawaii Tourism Authority is basically a good one, but the HTA lacks both authority and resources to get it all done. To better manage one of the largest aspects of the Hawaii economy, a permanent Cabinetlevel post should be installed to augment what DBEDT may offer at the executive level.

The ever-accelerating pivot to address China’s expansion in the Indo-Pacific and risk of war over Taiwan has resulted in an increasing military budget for which Hawaii is one strong beneficiary. This will continue.

Huge turnover in the Department of Planning and Permitting as the result of FBI investigations finding rampant bribery caused extensive delays in obtaining permits, which has damaged Hawaii’s construction industry, another big local engine. The replacement administrators are also slow to approve permits because they want to be sure all of their decisions are fully compliant.

Many businesses already are experiencing margin compression from the COVID-19-related economic landscape and macroeconomic and geopolitical developments.

Labor shortage, combined with increasing minimum wage, is also ominous for small business. Minimum wage per HB 2510 signed June 23 brought hourly rates from $10.10 an hour since 2013 to $12 an hour this year, and rising to $18 an hour in 2028. The Hawaii unemployment rate was 3.2% in December where an unemployment rate of 4% to 6% is considered healthy.

Because the job market is generally strong, so many jobs remain unfilled, such as a 20% physician shortage and a 12% nursing shortage.

Many pundits predict a recession in the next three to six months. The most likely poor quarterly earnings in the second quarter will roil the capital markets, cause business failures, increase the unemployment rate and result in recession. It is wise that part of the budget surplus will be added to the rainy day fund not only to manage a recession, but also the risk of additional crises from climate disasters and disease.

It is essential that the people of Hawaii have a living wage, affordable housing and health care. However, it is also critical to closely monitor the health of Hawaii businesses because they too are at risk.

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Ira Zunin is a practicing physician. He is medical director of Manakai o Malama Integrative Healthcare Group and Rehabilitation Center (manakaiomalama.com). Please submit your questions to info@manakaiomalama.com. The column appears the first Wednesday of each month.