From the print edition
Laura Chinchilla’s administration of National Liberation Party leaders has thrown in the towel on a proposed tax hike and serious deficit reduction. Will Chinchilla now preside over a big decline in the Costa Rican economy? Not according to the Central Bank’s economics department.
Growth in gross domestic product – the sum of all production by every person and company in an economy – is the standard measure of economic good times and bad times. In good times, GDP grows, while in bad times it shrinks. But there’s a problem in measuring GDP. It takes a long time to add up everybody’s economic activity. So, GDP figures are generally published three to six months after a quarterly closing.
Costa Rica’s Central Bank has the greatest need for up-to-date information on GDP. After all, the institution is in charge of the country’s money supply, and needs to know how much money the economy needs. Since Central Bank officials can’t wait three to six months to find out how the economy is growing, they have developed a short-term predictor of GDP, which they call the Index of Monthly Economic Activity, or IMEA (see graph).
The IMEA is a weighted average index of production for most large companies in the Costa Rican economy. The Central Bank gathers the information by calling companies for their monthly production data. IMEA results in the chart have two parts: a monthly bar graph showing growth or shrinkage from the previous month, and a solid trend-line tracking the current month’s results versus the same month in the previous year.
It shows that 2010 was a tough year, with the monthly production-index bars consistently dropping, and the solid-line average declining steadily. But the economy recovered nicely in 2011 – not to the high-growth pace of 2009, but steadily positive for 11 out of 12 months.
For 2012, data is available up to March. Though monthly growth flattens, the moving average remains steadily positive.
Even with production numbers dropping recently, the economy has built up good momentum, and the moving average is holding at 7 percent over decent 2011 results.
Chinchilla’s administration argues that its failed tax hike was an exercise in fiscal responsibility, an attempt to quit kicking the can down the road and face up to the problem of unsustainable 5 percent government deficits.
Opponents criticize the tax-only approach, and say more spending reduction is needed. The odds are that this argument is now academic, as any significant fiscal reform will fall to the next administration, which takes office in 2014.
The good news from the Central Bank’s IMEA numbers is that Costa Rica’s economy is nonetheless doing well. Economist Gustavo Feoli, who works in the Central Bank’s Economic Statistics Department, where the IMEA is calculated, is cautiously optimistic as to Costa Rica’s medium-term prospects. He points out that the country’s 7 percent moving-average IMEA is the highest in Central America at the moment; the average for Costa Rica, Nicaragua, Guatemala, Salvador and Honduras is 5 percent.
In the Central Bank’s January economic projection for 2012, the institution forecast 4 percent GDP growth this year, if the tax package was passed. Growth was projected to drop to 3.8 percent without the tax package, under the assumption that without it, the government would have to sell bonds in the local currency financial market, competing with and putting upward pressure on interest rates banks must pay to attract deposits.
With the tax package now dead, the basic colón deposit interest rate has risen 2.5 percent, from 7.25 percent a year ago to 9.75 percent. In spite of this, Costa Rica’s stronger-than-expected production momentum, as measured by IMEA, should keep 2012 economic growth more than satisfactory.
“At the growth rate shown by the IMEA at the present time, Costa Rica’s economy will easily exceed the Central Bank’s optimistic GDP growth projection of 4 percent for 2012,” Feoli said.
The Central Bank official attributes this unanticipated economic resilience to stronger-than-expected demand for Costa Rican export products in the United States. Leading sectors of the incipient export-driven mini-boom are manufacturing and general and financial services.
A sectoral breakdown of IMEA also shows a modest reactivation in construction as an important growth contributor. Construction, though still slow, has seen small but positive growth since August 2011, recovering from 19 months of uninterrupted shrinkage in 2010 and the first half of 2011.