San José, Costa Rica, since 1956

Is C.R. Economy in Recession?

Economic activity fell further in December 2008 than during any month in the last 17 years, leading some economists to declare a recession. 

Production for the month was down 3.3 percent from December 2007, the biggest decrease since the Central Bank started calculating the economic activity index in 1991.

The manufacturing, tourism, export and construction sectors are being hit the hardest, as banks hold onto credit, U.S. tourists stay home and demand for Tico products drops here and abroad.

“For us, it’s clear we are in a recession,” said Eric Vargas, strategy director at Aldesa, a financial advising firm. Still, government authorities have not yet used the R word.

“I wouldn’t dare say if we’re in a recession or not,” Finance Minister Guillermo Zúñiga told the daily La Nación. “I don’t want to be alarmist or irresponsible.”

A good predictor of GDP, the economic activity index measures the quantity of goods and services produced across all sectors of the economy, such as the number of melons grown, square meters of housing constructed, gross domestic product and hotel rooms occupied.

In the last quarter of 2008, economic activity shrank at an annual rate of 9.3 percent, after shrinking at rates of 3.3 and 3.0 percent, respectively, during the two previous quarters.

Figures for GDP have not yet been released for the last quarter. But GDP shrank at an annual rate of 2.5 and 1.2 percent, respectively, during the second and third quarters of last year, according to Aldesa.

“Knowing nothing else about Costa Rica, if I heard ‘two consecutive quarters of negative growth,’ I would say, yes, that sounds like they’re in a recession,” said Josh Bivens, an economist at the Economic Policy Institute in Washington, D.C.

Alberto Franco, an economist with the consulting firm Ecoanálisis, warned that the Central Bank’s figures are preliminary and could be revised. Plus, he said,  Costa Rica‘s economy shrunk for two or more consecutive quarters in 2002 and 2004. On neither of these occasions was  Costa Rica‘s economy widely recognized as being in recession.

Still, everyone agrees the economy is hurting. Industrial production in December 2008 was down 16.7 percent from 12 months earlier. The number of hotel rooms occupied was down 5.5 percent. Agriculture and trade stagnated, while growth in the construction and banking sectors slowed substantially.

Official unemployment numbers were last calculated in July, when just 4.9 percent of the workforce was jobless. But business and union leaders say layoffs have increased. Luis Chavarría, president of the Social Security Workers’ Union (UNDECA) estimated that some 25,000 people lost their jobs between November and January.

Over the past seven weeks, at least six major companies reduced operations or closed entirely, shedding at least 700 jobs, according to the daily La Nación.

“Right now, we are in the eye of the hurricane,” said Randall Murillo, executive director of the Costa Rican Construction Chamber.

“We can’t say it’s coming, and we can’t say it’s over.”

Recognizing that the worst is yet to come, President Oscar Arias last month announced measures to “shield” the Costa Rican economy from an international financial meltdown. He pledged to expand cash transfer programs for poor people, make labor laws more flexible to avoid layoffs, and borrow nearly $2.5 billion from international banks to build public works projects and strengthen the financial system. (TT, Feb. 6).

“The coming months will be hard,” he said. “Poverty and unemployment will probably increase … People accuse me of being a pessimist, but pessimism is often just wellinformed optimism.”

Still, neither the government nor the Central Bank has followed economists’ lead in declaring a recession. In fact, the Central Bank has never officially announced a recession, said Henry Vargas, director of the Central Bank’s department of macroeconomic statistics.

“We see other countries announcing that they have entered recessions, and we are questioning why we’ve never done that,” Vargas said.

In part, he said, the Central Bank does not want to talk down the economy.

“It could cause an overreaction,” he said. “Firms could stop producing or investing because they worry they won’t be able to sell their products.”

The thought worries banks and politicians worldwide. The U.S. National Bureau of Economic Research (NBER), the private organization charged with declaring recessions in the U.S., did not do so until December 2008, a full year after the bureau said the recession started. 

In deciding whether to announce a recession, NBER takes into account real income, employment, industrial production and wholesale-retail sales, in addition to GDP. Vargas said the Central Bank would use a similar measure. Still, Costa Rica collects figures on employment and income just once a year, making it hard to base economic assessments on these factors.

“Official information on the Costa Rican economy isn’t as up-to-date or as complete as in other countries,” Franco said.

Still, he and other economists questioned the value of declaring a recession.

“Rather than fixating on a word to define the economy, we should focus on working to restore growth and improving quality of life for everyone who lives here,” he said.






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