Despite an optimistic outlook at the start of the year, the University of Hawai‘i Economic Research Organization predicts lean times for Hawai‘i in the months to come.
In February, UHERO’s first quarterly forecast for the year anticipated a gradual recovery from last year’s downturn in the local labor economy. But the organization’s second quarterly report, published Friday, predicts that living in Hawai‘i will become more expensive throughout the rest of the year.
This change in outlook stems from the ongoing war in Iran and the continued closure of the Strait of Hormuz, which has disrupted global commerce and sent oil prices skyrocketing.
“It’s hard to put an optimistic spin on this,” said UHERO Executive Director Carl Bonham Thursday, adding that the price of a barrel of oil impacts everything from the cost of travel to the cost of building houses.
Bonham said the oil shock is one of a trio of economic shocks impacting the nation, along with lingering impacts of President Donald Trump’s tariffs and labor disruptions caused by the Trump administration’s aggressive immigration policy.
Bonham said UHERO has no particular insight about when the situation in the Middle East might return to normal. Therefore, the quarterly forecast puts together a two possible scenarios based on when the Strait of Hormuz reopens.
But even an optimistic scenario — where the Strait reopens by the end of June — predicts that the price of oil will peak at about $120 per barrel and recede to about $90 per barrel over the next year. In this scenario, UHERO predicts inflation in Honolulu to reach a year-round average of 4.1%, 1.4 percentage points higher than the first-quarter forecast.
In the pessimistic scenario, where the Strait remains closed by the end of summer, UHERO predicts a barrel of oil will peak at $170 and remain above $100 well into 2027. In this case, Honolulu inflation for the year would average at about 4.8%, and the state real GDP would grow by only 0.4%, well below the 1.6% real GDP expansion UHERO predicted in the first quarter.
Despite this, Bonham said visitor arrivals and spending remain healthy. UHERO still predicts a 2% increase in arrivals this year, thanks in large part to a stronger-than-expected first quarter. However, Bonham said the increased cost of oil and fuel will cause visitors to slow as the year progresses, and the tourism industry will largely be buttressed by wealthier visitors who can more easily absorb the increased cost.
By 2027, UHERO predicts visitor arrival growth will slow to a trickle, with only a 0.2% increase next year.
In particular, Bonham said the Japanese visitor market will be particularly impacted, as the country continues to grapple with a historically weak yen.
“There’s never been a more expensive time for Japanese visitors to go to Hawai‘i,” Bonham said.
While construction remains one of the only industries in the state showing genuine growth — thanks to several projects like the New Aloha Stadium Entertainment District and the continuing rebuilding in Lahaina — the housing market is still soft, with single-family home prices far beyond what the median household can reasonably afford: in Honolulu, the median single-family home price is about $500,000 above what is affordable to a median household.
What’s worse, Bonham said, is that, following the March Kona Low storms, home insurers could choose to increase their premiums, exacerbating home prices even further.
The biggest takeaway from the report, Bonham said, is that “local families can expect just about everything to cost more.”
Bonham said the surge in prices will amount to approximately $100 more in monthly fuel and electricity expenses for the average household, to say nothing of increased food prices.
But, while UHERO doesn’t discount the possibility of a swift resolution to the situation in the Strait of Hormuz, Bonham said that many prices that have increased during the crisis may not come back down as quickly, if they come down at all.
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