Recession in Peru: what is it and how does it affect the household economy?

The head of the Ministry of Economy and Finance (MEF), Alex Contreras, confirmed what various specialists warned: Peru is in recession; after a decline of 0.58% accumulated so far in 2023. But how does this affect the families’ economy?

At a technical level, a recession implies two consecutive quarters with a negative gross domestic product (GDP), which causes a reduction in economic variables such as investments, consumption, production and job creation.according to the Central Reserve Bank of Peru (BCRP).

“The Peruvian economy is contracting. Basically, in an economy that produces less, job opportunities and business options for entrepreneurs decrease. Thus, the living standards and purchasing power of the population begin to fall.. This also translates into a drop in demand and consumption, which in turn has a negative effect on economic growth,” economist Armando Mendoza told La República.

Thus, Families choose to restrict their consumption levels, which directly affects their own well-being. One of the most serious factors is the lack of food acquisition due to lack of resources, which has also been affected by inflation. According to the latest survey on food insecurity from the Institute of Peruvian Studies (IEP), 70% of households confirmed that in the last three months they have experienced a decrease in food consumption.

Mendoza also specifies that in other activities and sectors, the resources allocated to health care, entertainment, attendance at restaurants, travel planning or the acquisition of an apartment, car or other asset would be suspended or reduced.

“Since 2020, it will have been 4 years in which people have used their savings saved in the bank, their CTS, their AFP. There is no longer where Peruvians could get savings to be able to maintain their consumption levels and living standards. “We are entering a worrying panorama,” he added.

Kurt Burneo: BCRP monetary policies also generated a slowdown

For his part, Kurt Burneo, former Minister of Economy and Finance, pointed out that another of the factors that have contributed to the current slowdown are the monetary policies promoted by the BCRP, which maintained its reference rates at 7.75% for seven consecutive months. . This in order to be able to face inflation after the excess liquidity produced by the pandemic, and thus also be able to make credit more expensive.

“Although inflation is falling, we must say things in full: doing so implies less economic activity. Expensive credit means less consumption and investment. All responsibility for the slowdown is placed on the MEF when the BCRP also has responsibility,” he told RPP. It should be noted that the BCRP has already decreased the reference interest rate by 25 basis points for September (7.50%) and October (7.25%).