The United States: the effects of the recession or forced decline of Colombia – sectors – economy

The winds of recession in the largest economy on the planet, the United States, are blowing with increasing force, fueled by the decision last Wednesday of the Central Bank of that country (the Federal Reserve) to adjust its reference rates upwards at rates we have not seen. Since 1994, it has left it at 1.5 and 1.75 percent levels.

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Although at the end of previous meetings of the organization, Jerome Powell, Chairman of the Federal Reserve, expected successive hikes in its prices in order to contain the violent escalation of prices (inflation reached 8.6 percent in May, the highest level in 41 years), the announced adjustment surprised part A large number of analysts, who have already predicted a sharp contraction in the US economy, a fact that will have repercussions in most countries of the world, including Colombia.

However, some economists do not believe that the situation will continue yet, to the extent that interest rates remain at low levels, while inflation is crossing the ceiling, which “does not give reason to believe that a recession is possible,” he asserts.

However, they agree with Powell that they are not experiencing a recession, but rather a significant slowdown to 2 percent levels this year.

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Among those who see that the strong economic downturn in that country will not be reversed, there are also differences, because while some expect it to happen this year, others see that this process will take between one and two years.

At the moment, forecasts for the performance of the US economy indicate that it will remain at about 2.5 percent, as predicted by the World Bank, slightly higher than Powell’s forecast and much lower compared to the recovery in 2021, 5.7 percent.

for and against

Undoubtedly, the impetus for this uncertainty in the face of the development of the US economy was the sharp adjustment of the reference rates of the Federal Reserve.

And although Andrés Langebaek Rueda, Executive Director of Economic Studies at Grupo Bolívar, considers that this situation is not enough to generate such pain, Yes, you should keep an eye on the market because there are several channels through which such a situation can occur.

The economist is not ignorant of the fact that the Federal Reserve is raising its rates, that the cost of money to businesses and individuals is rising and that higher product prices reduce the purchasing power of consumers, which can lead to a recession

In his opinion, “rates are at levels not in line with a recession,” adding that the rising cost of living there is not that serious because people have savings, not at high levels, but better than those in Colombia.

“Inflation worries me more here than it does in the United States with that effect, because 80 percent of people here don’t have savings,” he says. He insists that the chances of a recession are still low, at 30 percent, according to some market estimates.

The speed at which a potential recession can occur is a concern of economists.
Markets expected it to reach 50 percent next year and up to 65 percent in two years, due to higher credit, warns Sergio Olarte, chief economist at Scotiabank-Colpatria.

Alejandro Reyes, chief economist at Colombia BBVA Research, agrees, and is convinced that such a situation has a high probability of occurrence, although he considers it “will not be a deep or prolonged recession.”

According to the economist, they are of the opinion that the short-term dynamics are still strong and that the recession, if it materializes, is likely to be more towards the end of 2023 and the beginning of 2024. But there are those who consider that this recession may come sooner rather than later due to symptoms very similar Symptoms of economic crises in the past, such as the crisis of 2008, although the cause of the current crisis is the epidemic.

That is the view of Felipe Campos, director of economic studies at Grupo Alianza, who noted the rising cost of raw materials such as oil (today is more than $113 a barrel), rising interest rates and bonds, a stressful cost of living, and rising prices. The dollar and the resistant economy form a situation from which there is no way out that ends up exploding, as we have seen in the past.

“I see recession this year, I’ve seen it since the beginning of 2022. For me, the inflation shock and what was coming in rates would have generated a self-destructive dynamic similar to that of 2008,” says Campos, for whom there will be no downside. Soft, because although central bankers seek to contain demand, they do not have the magic formula to do so quietly.

blow to colombia

Infecting the world’s largest economy with the disease is not in anyone’s interest, let alone Colombia, because it is the main trading partner.

Sergio Olarte, economist at Scotiabank, warns that “there will be no demand for goods and products from our country, and non-traditional exports, as well as the demand for oil, could be affected, leading to a lower oil price.” Colpatria, and adds that product imports from the US could also be affected, which would have negative effects on the market.

He agrees with other economists, who are of the view that such a situation will lead big capital to look towards economies with lower risks and Colombia is not in this group. There will be moderation in risks and investors will look for better havens for their capital, says Alejandro Reyes, BBVA Research, “which is nothing more than moving it into the US in dollars. This will put more pressure on the exchange rate and higher domestic prices.”

He adds that in the case of Colombia, there is also an indirect effect through the price of oil, since in this context the prices of basic commodities, such as oil, are reduced, which means that Colombia will receive little foreign exchange and resources in this area, reducing investment in the sector, And pressure on the public financial accounts, and influence on the external balance.

“The degree of this will depend to a large extent on the duration and depth of the recession,” the economist notes.

Possibility of capital flight due to rising prices

Analysts are of the opinion that raising the interest rate in the United States will lead to a strong outflow of resources from the country, which will also lead to pressure on the exchange rate, among other immediate effects.

“Rising the interest rate, regardless of the US recession; on the one hand, it pushes the exchange rate higher. That is why we have seen him this year flirt several times with $4,100. And second, it makes the entire global financing structure more expensive, which means that interest rates Localization is also being raised and this slows down local economic growth,” says Alejandro Reyes, BBVA Research.

In turn, Sergio Olarte, from Scotiabank-Colpatria, emphasized that higher interest rates in the US indicate that for capital to reach Colombia, domestic interest rates must be higher, which is where the Bank of the Republic must raise rates even more. a little bit. Thus avoiding capital outflows.

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