Economic recession would worsen in 2024 after El Niño hit

The announcement of a recession in the Peruvian economy by the Ministry of Economy and Finance (MEF) has only confirmed the progressive deterioration that had been noted for almost a year and that could degenerate a de-escalation of the GDP until 2026 with the extenuating El Niño (FEN) knocking on the door.

Unlike previous presentations, in which he still denied the possibility of an ongoing recession, the head of the MEF, Alex Contrerashas postponed its annualized growth forecast for 2023 until January 2024, even though the September numbers do not seem to be far from those of August (-0.63%) and July (-1.29%).

“Peru has the potential capacity to grow around 3%“What we want is to implement actions to return to the levels of yesteryear,” he said on National Radio. However, the rating agencies and consultancies seem to have it clearer. The 2023 GDP consensus is around 0%: Moody’s (0.6%), Credicorp Capital (0%), BBVA Research (0.4%), Macroconsult (-0.2%), Thorne & Asociados (0 .4%), Barclays (-0.6%), among others. All with a downward bias.

It must be considered that this recession It had its genesis in October 2022, when a sustained drop in collection began, and confirmed in July of this year after the conjunction of two consecutive quarters of decline, although Minister Contreras ruled out this possibility at that time. Finally, economic theory was stronger.

No exit compass

The former vice minister and professor at the Universidad del Pacífico Carlos Casas maintains that the relationship between national production and population growth rates has been broken, with which the GDP per capita will go to the ground. This will mean less income for people, low consumption, less investment and widespread unemployment. What will grow is poverty, which could hit a record in 2023.

Along these lines, Casas rules out a rebound effect of the economy in 2024, as occurred after the pandemic, due to the scourges of El Niño – Contreras says that the preventive execution will end in November, that is, in a month and a week – and low business predictability. Instead, he anticipates an excessive growth of informality.

“In a few months there may be some rebound, but it won’t be anything spectacular. There are also no big projects on the horizon, which were a kind of signal to investors. That is where one sees that the investment is basically private and depends on expectations, which are not at their best right now,” he says.

Juan José Marthans, director of the Academic Area of ​​Economics PAD School of Management of the University of Piura, goes further and does not see a clear recovery, at least, until 2026.

The former head of the SBS declares that the single trigger of a severe FEN would “liquefy” the current forecasts of 2% – 2.4% of GDP in 2024 to zero, added to the slowdown of the mining engines, which had their last in Quellaveco breath.

“If we review, the private investment for the triennium 2022-2023-2024, according to the BCRP, will be negative. Therefore, it is highly probable that this GDP will liquidate in terms of expansion and we will also have growth close to 0%,” he says.

Marthans adds that the “factors that are compressing the productive dynamics are exogenous”, but that they are not divorced from the political leadership, which has deteriorated since the previous Government. We are no longer talking about an economy ready for external shocks, but rather one with extremely vulnerable forecasts.

“If the El Niño disaster appears next year, the conditions for growth beyond 2024 will also be limited. All this will limit the growth of the average annual GDP until 2026. How much could we grow in the five-year period? I believe that in 1.5%, in conclusion, it will be lost,” she says.

Recession at every table

However, what does it mean for Peruvian families that the economy has entered an irreversible recession? Economist Armando Mendoza specifies that this negative growth affects production, employment opportunities and business options for entrepreneurs.

“Living standards and purchasing power of the population begin to fall. Families choose to restrict their consumption levels, which directly affects their own well-being,” Mendoza laments.

For his part, Pedro Francke, former Minister of Economy and Finance, explains that the key factor in the slowdown is the reduction in workers’ salaries in real terms, since they have not been adjusted to inflation levels. This results in lower purchasing power and, on the other hand, a decrease in sales.

In that sense, one of the immediate consequences will be the drop in the Christmas campaign compared to previous years. It should be noted that, in particular, the recession that Peru is currently going through implies a 9% drop in the industry, construction and agriculture sectors. The only sector in recovery is miningwhich mainly favors exporting companies.

“It is a recession that It mainly affects those areas where there is more employment and which constitute the main source of income for the majority of citizens. Thus, it hits the pockets of working families particularly hard,” said Francke.

For now, MEF aims to inaugurate a second anchovy season and reactivate public spending – with measures such as a bonus of S/600 for public sector workers – to alleviate the fall below 0% of GDP, although still without a clear north.

Gamarra calls for the resignation of Minister Alex Contreras

“It is unacceptable that, for 10 months, he repeated and assured us that everything was fine, that the country would grow, that there would be a rebound in the economy, although all the indicators said exactly the opposite. From Gamarra, we consider that the permanence of the Minister of Economy in the face of the facts is unsustainable; someone capable of implementing public policies that allow us to overcome the recession is required,” they urged from the Gamarra Association Peru in a statement.

Congressman Carlos Anderson also questioned Contreras’ management in the MEF, which “has failed.” He believes that the official “has been very good at selling stories,” but reality caught up with him.

Reactions

Juan José Marthans, director of PAD U. Piura

“There is talk of a rebound in 2024. That is uncertain, we must have more judgment and wait for the political front to rearrange itself to provide the necessary viability. Without a political solution, there is no economic solution.”

Carlos Casas, economist U. Pacífico

“People are being cautious when making investment or consumption decisions. There will be businesses that will close, although they may recover later construction in some way if infrastructure is lost.”

The output may be too weak

Luis Arias Minaya, former head of Sunat and Banco de la Nación

Although a recession is not defined by the fall of two consecutive quarters in GDP, it is already a warning sign. We had two consecutive drops in GDP in seasonally adjusted terms completing the first quarter. It was already warned in May that we were going to have two falls in a row. Recessions usually do not last long, because just as there are falls, there are rebounds. It seems that in August we have hit rock bottom, but we will not be able to know until we see the data for September and October.

The exit from the downturn may be very slow and weak; and I think he supplemental credit announced by Minister Contreras is a very small one. Regarding the annual GDP, it is barely 0.5% of this, and it is also happening at the end of October, when there are only two months left to execute the budget. Added to the fact that it is a supplementary credit that is financed, in the minister’s own words, by chocolate: items are withdrawn from one side to increase in others. A fiscal policy expansion of this type is very insignificant.

Considering the latent risks, such as a more than moderate El Niño, we may not have hit bottom yet. Bounces are inevitable, but we must take these risks into account.

Non-primary manufacturing has been hit, construction and on the demand side, private investment was affected; all in a scenario where less taxes were collected for several months in a row.

Direct indicators show a contraction in consumption with credit and debit cards of up to double digits. It is not total consumption but, let’s say, among the highest income socioeconomic levels, who tend to use them. It is an anticipation that global consumption will also fall.

If you wonder why the Ministry of Economy and Finance did not recognize the recession, you will have to ask the MEF, but there was already a set of indicators that showed us that this was a recession.

Keys

• Forecast. The first time that MEF recognized a recession occurred in January 2023, but focused only on tourism.
• Defending. Between January and June 2023, private consumption grew only 0.3%, which means the worst semester since 2000, INEI reported.