The Central Bank of Ecuador warns that the Ecuadorian economy has entered a recession

The Central Bank of Ecuador (BCE) warned that the Andean country’s economy entered a recession in the first quarter of 2024 (-0.4%) and recalled that it had been in contraction since the fourth quarter of 2022, according to an analytical bulletin in which it notes that it has applied a new measurement methodology.

The bulletin presents the results of the Economic Cycle and the System of Composite Economic Indicators (SICE), composed of the coincident composite indicator (ICC) and the leading composite indicator (ICA), corresponding to the first quarter of 2024.

The CCI reflects the general state of the economy and its turning points (peaks and troughs). The CCI seeks to anticipate the turning points of the economic cycle based on the information on its components available at a given date, the ECB explained.

He also warned that the results and interpretation of the indicators are not comparable with the Economic Cycle reports published until the second quarter of 2023.

In this new methodology, calculations were made starting from the first quarter of 2000, which will allow for the availability of historical series for carrying out various analyses and studies, the monetary institution noted.

According to its new methodology, the Gross Domestic Product (GDP) cycle was below its long-term trend in the first quarter of 2024.

“The deceleration phase began after the third quarter of 2022, when the Ecuadorian economy reached a peak in the cycle (1.7%). After this, the Ecuadorian economy began a contraction process in the fourth quarter of 2023, showing that it is currently in a recession stage,” Banco Cnetral stressed.

The report noted that in the first quarter of 2024, the ICC was below the long-term trend in line with the GDP cycle, with a correlation of 93.7% at its peak, “which confirms that the Ecuadorian economy is currently in a recession stage.”

“For the second quarter of 2024, the ICA anticipates that the Ecuadorian economy will remain in a recession stage,” the report said.

Previous warnings from the Central Bank

Last June, the Central Bank reported that, in the first quarter of 2024, Ecuador’s GDP grew by 1.2% compared to the same period in 2023, which it attributed to a reduction in imports (3.3%) and an increase in stocks (inventories).

However, the main components of GDP showed year-on-year contractions: government spending by -0.3%, exports by -0.5%, household consumption by -1.1%, and investments by -1.3%.

Last April, the World Bank (WB) already warned that the economy was slowing substantially due to an increase in insecurity caused by organized crime, disruptions in oil production, climatic events, and political uncertainty.

At the same time, he warned that the government of Daniel Noboa would face significant liquidity restrictions and a large financing deficit, which was expected to increase in the coming years in the absence of structural fiscal reforms.

Large deficit in 2023

Ecuador’s economy closed 2023 with a deficit of around $4.8 billion, approximately 5% of gross domestic product (GDP), prompting President Daniel Noboa to undertake a series of unpopular economic reforms.

In addition to implementing measures to address short-term liquidity constraints, such as a $4 billion loan program with the International Monetary Fund (IMF), the value-added tax (VAT) was raised from 12% to 15%, the tax on foreign currency outflows (ISD) was raised again to 5%, and since the end of June, subsidies for the most widely consumed gasolines in the country have been reduced.

Among the greatest challenges, the World Bank mentioned that the country needs to regain the confidence of capital markets and generate fiscal buffers to be able to face the changes in the international and climatic context.

He also pointed out that the public sector needs to reduce its dependence on the oil sector, which, while being affected by the maturity of wells and insufficient investment, has to face the decision of a referendum to stop operations in the Yasuní National Park.