Recession in the United States: calculations of the impact in Colombia, if it occurs

Recession in the United States: calculations of the impact in Colombia, if it occurs

The winds of recession in the world’s largest economy, the United States, are blowing with increasing intensity, fueled by the decision last Wednesday by that country’s central bank (the Federal Reserve) to adjust its key rates to the increase in proportions not seen since 1994, leaving them at levels of 1.5 and 1.75%.

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While Jerome Powell, Chairman of the Federal Reserve (Fed), had anticipated, following the organization’s previous meetings, successive rate hikes in order to contain the aggressive escalation of prices (inflation reached 8 .6% in May, the highest in 41 years), the announced adjustment surprised a good part of the analysts, who are already predicting a drastic contraction of the American economy, a fact which will have repercussions in most countries of the globe, including Colombia.

However, some economists do not believe that the situation will go as far, insofar as interest rates remain at low levels, while inflation has burst the roof, which “does not suggest that ‘a recession could be generated’, they emphasize.

They agree with Powell, however, that they don’t see a recession, but rather a significant slowdown to 2% levels this year.

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And, among those who see that a sharp economic contraction in this country would not be reversed, there are also differences, because while some predict that it will occur this year, others consider that this process will take between one and two years.

For now, projections for the performance of the US economy suggest that it will remain around 2.5%, as predicted by the World Bank, slightly above what Powell expects and much less compared to the rebound. from 2021, 5.7%.

Pros and cons

The trigger for this uncertainty regarding the evolution of the American economy was undoubtedly the sudden adjustment of the Fed’s benchmark rates.

And although Andrés Langebaek Rueda, Executive Director of Economic Studies of Grupo Bolívar, considers that this situation is not enough to generate these anxieties, yes, you need to watch the market, because there are several channels through which such a situation can occur.

The economist is aware that the Fed is raising rates, the cost of money for businesses and individuals is rising, and high commodity prices are reducing consumers’ purchasing power, which could lead to a recession

In his opinion, “las tasas están en niveles que no son consistentes en generar una recesión”, y agrega que el alto costo de vida allí no es tan grave porque la gente tiene ahorros, no en niveles altos, pero sí betters que los de Colombia.

“I’m much more worried about inflation here than in the US with that effect, because 80% of people here don’t have any savings,” he says. He insists that the chances of a recession are still low, at 30%, according to some market estimates.

The speed with which a possible recession may occur is another of the concerns of economists.
Markets have predicted it 50% for next year and up to 65% in two years, due to rising credit, warns Sergio Olarte, chief economist at Scotiabank-Colpatria.

Alejandro Reyes, BBVA Research’s chief economist for Colombia, agrees on this point and is convinced that such a situation has a high probability of occurring, although he considers that “it would not be a deep recession or extended”.

According to the economist, they find that the short-term momentum is still strong and that the recession, if it materializes, may be more severe 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 to those of past economic crises, such as that of 2008, although the cause of the current crisis is the pandemic.

This is the opinion of Felipe Campos, head of economic studies at Grupo Alianza, for whom the high cost of raw materials such as oil (today more than 113 dollars per barrel), the rise in interest rates and obligations, an overstretched cost of living, a rising dollar and a resilient economy pose a hopeless situation that ends up exploding, as we have seen in the past.

“I see the recession this year, I saw it from the beginning of 2022. For me, the inflationary shock and what was happening in rates was going to generate this self-destructive dynamic similar to that of 2008,” says Campos, for whom there will be no soft landing, because if central bankers seek to contain demand, they do not have the magic recipe to do so gently.

The blow for Colombia

It is in no one’s interest for the largest economy in the world to fall ill, let alone Colombia, since it is the main trading partner.

“There would be no demand for our country’s goods and products, and non-traditional exports, as well as the demand for oil, could be affected, leading to a fall in the price of oil,” warns Sergio Olarte, an economist at Scotiabank. Colpatria, and adds that imports of products from the United States could also be affected, which will have negative effects on the market.

And he agrees with other economists, who see that a situation of this nature will lead big capital to turn to lower-risk economies and Colombia is not in this group. Alejandro Reyes of BBVA Research says there will be a moderation in risk and investors will seek better havens for their capital, “which is nothing more than taking it to the United States in dollars. This will put more pressure on the exchange rate and local rates to rise.

She adds that, in the case of Colombia, there is also an indirect effect via the price of oil, since in this context the prices of basic goods, such as oil, are reduced, which would mean that Colombia would receive less currency and foreign resources on this front, limiting investment in the sector, putting pressure on fiscal accounts and affecting the external balance.

“The extent of this will largely depend on the duration and depth of the recession,” said the economist.

Possible flight of capital due to rate hikes

Analysts argue that rising rates in the United States will cause a large outflow of resources from the country, which will also put pressure on the exchange rate, among other immediate effects.

“Rising rates, independent of a US recession; on the one hand, it pushes the exchange rate upwards. That’s why this year we’ve seen it flirt several times with $4,100. The second, makes the whole global financing structure more expensive, this implies that local interest rates are also pushed up and this slows down local economic growth”, explains Alejandro Reyes, of BBVA Research.

In turn, Sergio Olarte, of Scotiabank-Colpatria, argues that higher interest rates in the United States suggest that for capital to arrive in Colombia, local interest rates must be higher, this for what the Bank of the Republic should raise interest rates a little more. and thus avoid capital outflows.

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