To handle the slowdown and avoid falling into recession – Sectors – Economy

It is sung: in 2023 comes a sharp slowdown in economic production around the world. In fact, it has already been felt, with a recession in the UK, for example, and two quarters of contraction in the US.

In the midst of this panorama, Colombia is one of the countries in which fear has been expressed that not only will there be less growth, but that it will fall into recession. The reason: the 21 billion pesos that, due to the tax reformhouseholds and companies would give more to the Government, and that they could not use in greater consumption or greater investment.

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When the reform was processed, the president of the National Association of Entrepreneurs (Andi), Bruce Mac Master, commented that conditions were created for Colombia to have a crisis «deeper than that of many other countries.»

The Minister of Finance, José Antonio Ocampo, has said that those billions that companies and homes will no longer use will be spent by the Government anyway. It would be necessary to see if the time gap in which it is collected and then spent will not generate a bump in economic activityor if government spending, for example on subsidies, will have the same multiplier effect on economic activity as productive investment by companies.

The multiple world crisis – which has been clear during 2022 – is the sum of the consequences of the pandemic, the inflation suffered by the entire planet and the impacts of Russia’s invasion of Ukraine.

Since the beginning of 2020, covid-19 presented harsh biosecurity measures; these caused traffic jams at ports and container shortages. Then came the lack of supplies such as chips, inputs, raw materials… And the prices of almost everything, almost everywhere, began to rise.

And when the world believed that it was recovering lost ground – without having overcome those consequences of covid-19 -, Russia invaded Ukraine. To all of the above, then, was added a greater shortage of products in which these two countries are leaders: natural gas, grains such as wheat and fertilizers to produce food. The prices of almost everything, almost everywhere, are accelerating their rises.

Panic over the worst inflation seen in decades led the banks that issued the currencies in many countries to raise your interest rates, including Banco de la República, in Colombia. The logic is that if interest rates are higher, credit purchases and loan-financed investments decline, and inflation should subside.

But also, if less is actually consumed and invested, it is to be expected that economic activity and production will drop, which is what they call a ‘recession’. With less production, the consequences are less work and families with less income to meet their needs.

(Also read: The unemployment rate in Colombia in November was 9.5%)

Rhythm is lost

During 2022, after the fall due to the pandemic, Colombia was, especially in the first semester, one of the countries in the world with the highest growth and significant relief in employment levelsas well as in recovery of the ground lost in poverty.

But in recent months, a loss in the rate of growth has already been noted. After the growth levels, which in the first semester of 2022 reached 17 percent per year, by October they were reduced to less than 5 percent.

And what analysts from the Banco de la República foresee is that in 2023 the growth of the gross domestic product in the country will be barely 0.5 percent.

This growth will actually mean that the per capita production of Colombians will be reduced, since the increase in economic activity would be less than the increase in population.

In other words, according to the Banco de la República forecast, by 2023 the income of Colombians will be reduced. In Colombia, a drop in production per inhabitant has only occurred twice in the last 23 years: in 1999, in the Upac crisis, and in 2020, with the pandemic crisis.

All this panorama goes hand in hand with the price hikes, which continued to accelerate until November, and with the boost that they will continue to receive from the increases in gasoline that the Government will order and the price increases in a group of foods ordered in the tax reform, together with the blow to kitchen and household products with the higher taxes on their plastic packaging, also ordered in the reform. Likewise, the impact of the dollar, which remains at record levels, almost 20 percent more expensive than a year ago.

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Thus, two keys to the year that is starting are the course of inflation and how the dollar will behave. The fate of prices, to a large extent, will continue to depend on the effects of the Banco de la República rate hikes, those that have already been applied and those that are yet to come. The same slowdown would bring lower consumption, which would ultimately also curb inflation.

The Bank of the Republic hopes that inflation drops from the current 12.54 percent to 7 percent at the end of 2023, and return to its target of 3 percent at the end of 2024. Meanwhile, the dollar will continue to keep up with fear of a global crisis and, perhaps, lower expectations of rate hikes from the Federal Reserve (Fed , US issuing bank).

These external factors common to all countries made the dollar rise 4.6 percent, on average, against the currencies of emerging economies, including Colombia, according to Fed data.

But in colombia the dollar became 20 percent more expensive. If the first 4.6 points are due to global factors, the rest – three quarters of the rise – would have been due to internal factors such as the contradictory messages from the new government.

Thus, confidence within the private sector will be key for businessmen and households to maintain investment and consumption decisions that counteract all these factors that could lead to a recession, as well as the way in which the Government avoids sowing uncertainty.