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Economy Shrinks for 6th Month

After months of reporters and economists hounding government officials, trying to get them to say the word “recession” in an affirmative statement regarding the Costa Rican economy, this past week it finally happened – albeit vaguely.

In any case, the concessions shouldn’t come as a surprise, since Costa Rica has seen its economy weaken for more than a year, and all signs indicate the trend will continue through 2009.

The economy has slowed every month since it recorded just over 7 percent annual growth in November 2007, according to the Central Bank’s monthly economic activity index (IMAE).

And, in the last two quarters, the economy has stumbled into the red, with the IMAE indicating six straight months of a shrinking economy, when compared with the corresponding months of the preceding year.

Six months marks a significant time period for the economy to be in the red, as it is widely accepted by economists that an economy is in recession when it suffers two straight quarters of negative economic growth.

President Oscar Arias and the head of the Central Bank, Francisco de Paula Gutiérrez, both conceded that, using the above yardstick, Costa Rica is in a recession, the daily La Nación reported Wednesday.

However, Arias insisted that Costa Rica has taken appropriate action to lessen the economic pain.

“The crisis would have been worse if we hadn’t had CAFTA (Central American Free-Trade Agreement with the United States),” Arias told Reuters news service. “With CAFTA, almost all of our exports enter the United States tax-free.”

Many economists agree with Arias’ assessment, but the rate of economic contraction seems to be a surprise.

For each month since November 2008, the IMAE report has seen a record increase in the rate of economic contraction since the Central Bank started calculating the IMAE in 1991.

During the recession of 2000 and 2001, the economy shrank for 11 months straight; but no single month registered more than 2.1 percent negative growth, when compared with that same month of the year before.

March 2009 logged 6.2 percent negative growth in contrast to March of last year.

Official or not, the Arias administration has been acting like a government in the midst of a recession since early this year.

In his Plan Escudo, or Shield Plan, which passed Jan. 29, Arias opened the door to expand cash transfer programs, ease labor laws to avoid layoffs, and take out a $2.5 billion loan from international banks (an option he has yet decided to act upon).

It is unclear whether the plan is having the desired affect on the economy to date, but the government has held up the reduced interest rates offered by the three major banks for housing and personal loans as a major stepping stone.

Still, Arias faces many critics, and he also must find a new economy minister to replace Marco Vargas, who resigned from the position on Wednesday. Vargas said he wants to focus on the task of coordinating disaster relief for victims of the January 8 earthquake.

Some economists contend the country is not truly in a recession, as some sectors of the economy are still growing.

Since negative growth hasn’t spread across the majority of sectors, it’s not technically a recession, according to Elvia Campos, head of statistics for services and construction with the Central Bank. Business services continue to maintain relatively high growth, while a number of other industries are registering consistent growth.

However, of the 14 sectors tracked by the IMAE, six of them have begun to contract, part of a trend that was enough for Aldesa, a financial advising firm, to declare a recession back in February.

“Almost half of the sectors are contracting and the rest are decreasing their growth,” said Ana Toyama, strategy coordinator for Aldesa. “We expect the economy to continue contracting in 2009.”

The hardest-hit industry has been manufacturing, showing a contraction of almost 17 percent since this time last year. The hotel industry, a good indicator of the tourism industry’s health, shrunk 9 percent in the same time frame.

Still, some question the relevance of an official declaration. The United States didn’t officially acknowledge it’s recession until a year after it began – and by then, like here, it had already been called a recession by many economists.

For its part, the Central Bank has never officially announced a recession, said Henry Vargas, director of the bank’s department of macroeconomics.

“It could cause an overreaction…and firms could stop producing or investing,” he previously told The Tico Times (Feb. 20).

The unemployment rate has been increasing steadily, said Luis Chavarría, president of the Social Security Workers’ Union. He said that from November 2008 through March of this year, an estimated 35,000 workers have lost their jobs – at least 10,000 of whom have lost them since January.

The unemployment rate was at 4.9 percent at the end of 2008, – the most recent statistic available from the Labor Ministry.

But Chavarría estimated there were at least 50,000 informal workers who aren’t recognized in government statistics.

Heidi Shierholz, a labor economist with the Economic Policy Institute in Washington, D.C., said that since the unemployment rate is a lagging indicator, the economy can improve before employment numbers rise.

“Things like GDP, production, sales, can all pick up and the recession can be officially declared over with economists everywhere celebrating, but still with unemployment continuing to rise,” she said.



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