Monday 18 October 2021

Central Bank estimates for this year the biggest economic contraction since 1982

According to the revision of the economic projections by the Central Bank this Thursday, July 30, the fall in production will be 5%, the deepest in almost 40 years

BusinessEconomyCentral Bank estimates for this year the biggest economic contraction since 1982

According to the revision of the economic projections by the Central Bank this Thursday, July 30, the fall in production will be 5%, the deepest in almost 40 years

(QCOSTARICA) The Banco Central de Costa Rica (BCCR) – Central Bank – published on Thursday afternoon, July 30, the revision of the country’s economic projections and now estimates a stronger drop in production, in 2020, than had been announced in April.

Sign of the times. “…. Closed until further notice.”

The entity foresees a contraction of 5% this year and with partial recovery, in 2021, of 2.3%.

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“This year the national economy is going to suffer the strongest contraction since 1982,” said Rodrigo Cubero, president of the Central Bank. In that year, production fell 7.3%.

The drop is significantly influenced by the expected drop in household consumption, which is forecast at 3%. Investments would also fall 8.8%, exports 14.7% and imports 10.2%. The only component of aggregate demand that would increase is government spending, at 0.7%.

In January 2020, the Central Bank expected a growth in production of 2.5% for this year and 3% for the next, but with the arrival of the pandemic last March, the entity adjusted the projections in April to a 3.6% drop in 2020, with a 2.3% recovery in 2021.

Cubero explained that the new adjustment between April and July is due to the revisions in the performance of the world economy carried out by the International Monetary Fund (IMF) and because the pandemic has demanded more measures of sanitary restrictions. He clarified that these projections are subject to great uncertainty.

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“Although the lifting of sanitary restrictions began in May, earlier than originally expected, the abrupt escalation in the contagion rate of COVID-19 as of June stopped this reopening process, forcing (the government) to intensify some of the confinement measures, and suggests a possible selective tightening of these measures in this second half. This contrasts with the assumption in April of a gradual opening in this second semester,” the Central Bank detailed in a statement.

Only in the second quarter of 2020 the economy fell 9.2% compared to the same quarter of the previous year. The most affected sectors are hotels and restaurants, with a drop of 50% in that period, and transport, with a reduction of 38%.

The lower production is reflected in an increase in unemployment, which reached a record figure of 20.1% in the moving quarter of March, April, and May (approximately 468,000 people), according to the National Institute of Statistics and Censuses (INEC).

Cubero explained that the Central Bank has applied an expansive and countercyclical monetary policy to mitigate the fall in production, with measures such as the reduction of the monetary policy rate to bring it to a record low of 0.75% per year, which has helped market rates fall. The entity, Cubero said, will continue with that approach.

The drop in production, together with the drop in tax collection and the higher spending to face the COVID-19 also raised the projection of the Government’s financial deficit (excess of total expenses over total revenues), which went from 5, 9% of production in the January 2020 estimate, to 9.3% of production. For 2021 it is expected to be 8.1%.

In the monetary sector, Cubero highlighted that savers have transferred resources to more liquid terms.

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In inflation, the Central Bank forecasts an average result of 0.8% for this year, below the target range of between 2% and 4%.

In the external sector, direct investment resources would not cover, for the first time, the current account deficit, but would have the resources of international loans to finance the shortfall.

The Bank explained that the projections incorporate the best information available as of July 28 of this year.

 

 

Q Costa Rica
Reports by QCR staff

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