Friday 3 February 2023

Cut in US growth forecast to affect Costa Rica’s economic momentum

The United States Federal Reserve predicts an expansion of that country's production of 2.8% in 2022, less than the 4% of its previous forecasts

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3 February 2023 - At The Banks - BCCR

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QCOSTARICA – In addition to announcing an increase in interest rates, on Wednesday, the United States Federal Reserve published a new projection for the growth of its economy in 2022, reducing it to 2.8% from the 4% it determined in its previous forecasts.

This new projection could negatively affect momentum from the Costa Rican economy, which maintained vigorous growth until January.

About six out of every 10 tourists who arrived in Costa Rica in 2021 came from the United States. Lower growth in that country implies a lower increase in the income of its inhabitants. Photo at the Liberia Airport. (ICT)

In 2021, the country’s production increased 7.6%, and in January the monthly index of economic activity grew 9% compared to the same month of the previous year. For the years 2022 and 2023, Costa Rica’s Central Bank projected an increase of 3.9% and 4%, respectively, in January 2022. All before Russia invaded Ukraine.

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The lower projection of growth in the United States implies a lower increase in income and therefore reduce the ability to buy, travel and invest.

For Costa Rica, the United States is a very important market.

In 2021, exports to the United States totaled US$6.6 billion, 43% of the total, and of all purchases made in Costa Rica, 38% came from the United States, according to data from the Promotora del Comercio Exterior (Procomer) – Foreign Trade Promoter.

As for tourism, in 2021, 64% of the total visitors were from the United States, according to information published by the Instituto Costarricense de Turismo (ICT) – Costa Rican Tourism board.

While in direct foreign investment, 68% of the total in 2020 was from the U.S., according to the information published by the Central Bank (the data for 2021 is not yet available).

“The decrease in the growth forecast for the United States will also negatively affect us, since this is the most important member of our economic zone (North America and Central America), in addition to being the world’s largest economy,” said Melvin Garita, manager of BN Securities.

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“These aspects point to the importance of advancing in other factors of our country’s competitiveness, with the aim of improving the productivity of our workers and generating more economic growth and consequently well-being for our society,” added Garita.

Stagflation process

In a webinar held on March 15, on the economic impact of the war in Ukraine on the international economy, the president of the Central Bank, Rodrigo Cubero, indicated that in the case of Costa Rica, it may be that the global and domestic consequences of the conflict lead them to make a downward revision in the margin of those growth projections, but he does not see it as likely that the Costa Rican economy will enter a recession.

“The inflation process that the world had already experienced since 2021 was itself a stagflationary process, the shock that was being received was a stagflationary shock in the sense that it was a negative supply shock, a shock that put upward pressure in inflation, and some downward pressure on economic growth in the world (…) so that what the Russia-Ukraine conflict does is exacerbate these stagflationary pressures,” said Cubero.

“It is important to clarify that when we say that the shock has a stagflationary nature, it does not mean that it will lead to a recession with high inflation, what it means is that by itself, ceteris paribus, the shock puts upward pressure on inflation. and downward pressure on economic growth,” he added.

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AFP reported that the president of the Federal Reserve of the United States, Jerome Powell, commented that it will take longer than expected to bring inflation to the 2% target, but he also maintained that growth remains solid and he sees no risk of a recession, as reported by

Ennio Rodríguez, president of the Colegio en Ciencias Económicas (College of Economic Sciences), commented that at the moment there are also other phenomena that have recessive effects on the world economy. He cited the new pandemic wave that is affecting China and the authorities’ response, which has been, once again, confinement.

“This will bring about a slowdown in the growth of that economy and a possible worsening of the container crisis,” said Rodríguez.

For its part, the Russian invasion of Ukraine has exacerbated the unresolved issues of the container crisis, added the economist, and stressed that these effects will be greater as the war lasts longer.

Translated and adapted from La Nacion. Read the original article “Recorte en pronóstico de crecimiento de Estados Unidos restaría impulso a economía de Costa Rica” (in Spanish) here


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