At LatinAmerican Post we analyze the Colombian economy in the face of a possible recession predicted by the president of the Andean country, Gustavo Petro. What is this situation and what consequences would it bring to Colombians? .
LatinAmerican Post | Christopher Ramírez
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Leer en español: Economía colombiana: ¿Cómo te afectaría a ti la recesión económica?
On October 13, the president of Colombia, Gustavo Petro, launched an announcement that caused great concern among his governed: his country would enter an economic recession in 2023, and the increase in interest rates established by the Bank of the Republic ( central bank) would be the culprit. "The truth is that the interest rate has grown, that globally then we have a recession in sight, and that the increased interest rate in Colombia will serve as a transmission belt of the world recession within the Colombian economy," said the Colombian president during an event for small industrialists.
What Is an Economic Recession?
As explained by experts from Santander bank, one of the largest and most important in the world, to understand what a recession is, you must first understand two highly relevant economic terms: economic expansion and economic contraction.
According to analysts, “the economy is made up of cycles of ups and downs, and its behavior is similar to that of a wave: when it grows, the curve begins to rise until it reaches its maximum capacity and then begins a downward phase until touch the minimums to, once again, climb again”.
In this regard, when economic growth is reported in a country, region or in the world itself, that specific moment is considered as expansion; however, everything that goes up must fall and after reaching all-time highs, the economy must start to go down: this is known as an economic contraction.
However, this situation is not considered entirely bad and should not represent a latent threat to a country's economy, according to experts, if it does not last for two consecutive quarters. In the event that this period is exceeded, and that the Gross Domestic Product (GDP) continues to fall for six months or more, economists already label this situation as a recession.
In a few words, the recession is known as that period of contraction that lasts a semester or more and that can discourage consumption in a country. In this case, after the increase in interest rates, not only in Colombia but throughout the world.
Faced with the threat of inflation due to situations such as the COVID-19 pandemic, the war in Ukraine and the rise of the US dollar, central banks around the world are opting for this strategy, in order to discourage people from buy and in this way regulate again the supply and demand of a nation.
However, this obviously slows down the generation of wealth exponentially, which starts to wreak havoc on an economy. In the words of Kristalina Georgieva, director of the International Monetary Fund (IMF), discouraging consumption would bring “some pain”, the first symptom being a global economic recession.
How Would Colombia Be Affected?
Although the national government experts do not consider that Colombia has yet entered an economic recession, taking into account that even in small steps the GDP continues to increase in that country, the truth is that said growth could come to a standstill next year.
The figures are clear: while in previous months it was expected that the country's economic growth would be 3.2% at the end of 2022, this expectation dropped to 1.8%. According to the Colombian Executive, if the inflationary path is taken (increasingly higher prices), this number could continue to decline.
According to the figures of the Colombian entities, the country is currently experiencing the highest cost of living in the last 23 years, and the numbers would only increase taking into account the emerging market situation in which Colombia finds itself. “The strength of the dollar constitutes a major difficulty for emerging markets,” the IMF said a few weeks ago. Of course, this represents an occasion of greater tension within the Colombian economy.
“If turmoil breaks out in financial markets, global financial conditions could deteriorate and the dollar could strengthen further, pushing investors into safe havens. This would add considerably to inflationary pressures and financial fragilities in the rest of the world, especially in emerging market and developing economies. Inflation could once again prove more persistent, especially if labor markets continue to be excessively tight,” said Pierre-Olivier Gourinchas, economic adviser and director of the IMF's research department.
So, even if President Petro considers that his country is at great risk of joining the threat of economic recession that afflicts the entire world today, the question that ordinary Colombians ask themselves today is: how would this situation affect them?
The answer is simple: directly. It should be remembered that the war in Ukraine, inflation and the post-pandemic period are seriously influencing the shipment of raw materials necessary for the production or generation of necessities. Developed countries such as the United States and China have been impacted by this reality, seeing their economies slow down, both for the purchase of materials and products and for their sale.
Thus, if the US, being the first commercial partner of Colombia in terms of exports and imports (26% in both items), and China, the second in imports (24%) see a negative impact on their economies, therefore Colombians will also be victims of them.
In summary: if the big partners do not have money, this means that they would not demand goods and services produced in Colombia. Therefore, the opportunity to import products from abroad would decrease, either due to lack of money or low supply.
In this way, this would affect both large companies in the interior of the country and the most humble of workers: without resources there is no way to buy, and if you do not buy there is nothing to sell; a vicious circle of demand against scarcity would be entered.