Is Costa Rica experiencing a recession?

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The results of the lower IMAE economic activity statistics open the discussion about whether the country is in a recession or not.

Household consumption grew by 3% in the fourth quarter of 2008 with respect to the same quarter of 2007.

Employment, measured by the number of insured workers, rose 8.5% in 2008 and continued upward in January, although there have been decreases in some sectors.

Roy Gonzalez, manager of the Central Bank, said that the term “recession” is associated with a significant decline in economic activity. “To know if a country is in recession it is necessary to review a broad set of indicators, including production, consumer spending, employment, real income and investment, in order to determine when and if the trends change in a countries economic cycle. “Some countries declare a recession when they encounter a significant drop in production for two consecutive quarters, “but from our point of view, this has not yet occurred in Costa Rica.”

The monthly index of economic activity fell 4.5% in January, for the fourth consecutive month. This is the Costa Rican economies largest contraction in 17 years, primarily affecting the manufacturing, agriculture, hotel and trade sectors.

The IMAE is a monthly indicator of the Central Bank of the physical quantity of goods and services produced in the country. The data used come from the trend-cycle, which excludes seasonal or cyclical factors. January is the fourth consecutive month in which the change of the indicator falls and the decrease is growing stronger. Since the indicator was developed in 1992, there has not been a drop of that magnitude. Of the 15 activities in which production is analyzed, six reported decreases in January.

In the retail sector, which is the largest area of employment, where one in five workers are employed, about 366,000 people, experienced record low sales of vehicles and construction materials.

The most dramatic reduction was in manufacturing with a decline in production of 17.5%. Manufacturing represents one fifth of domestic production and is the second largest employer; 13% of all employees, about 252,000 people.

The second sector that declined in January 2009 compared to January 2008 was the hotel sector and following in order of decreases were agriculture, commerce, electricity, water and mining.

The hotel sector, which employs 5.6% of all workers, almost 108,000 people, was hit by the drop in tourism.
In agriculture, which generates 12.7% of all employment, 245,000 people, was affected by the lower international demand for products as well as new restrictions on lending and poor weather conditions.

The downward trend since late 2008 in production, exports and imports will undoubtedly have an impact on investment, employment, consumption and income during 2009. The depth and duration of this impact will depend on government policy actions and if the adjustments are able to positively influence consumer confidence with Costa Rica’s major trading partners.

The International Monetary Fund (IMF), found that Costa Rica is in a significantly better position to respond to global economic shocks now than in the past, thanks to a marked improvement in public finances, sizable foreign exchange reserves, steps taken toward a more flexible exchange rate regime in the context of the transition to inflation targeting, and measures already adopted to strengthen the financial system.

Furthermore, the Costa Rican stock exchange has not experienced any major changes as a result of the turbulence affecting world financial markets. The chief executive of Costa Rica’s stock exchange, Jose Brenes, asserted that no major effect has been felt locally because the local exchange concentrates on fixed-yield, debt securities, and not shares of public companies that have been degraded in most global markets.

Costa Rica has begun to fill its trade gap with the USA by developing new markets in Asia as well as regionally in Central and South America and the Caribbean.

Costa Rica enjoys many positive factors that help insulate it from the effects of the global economic crisis, including its democracy and the many multi-national corporations that conduct business here and provide thousands of new jobs that stimulate growth in the local economy.

The country will continue to struggle with the global recession knocking on its door; however the Tico’s are resilient and most lead a simple life that can weather a recession without severe consequences.

Edited on Mar 17, 2009 11:17

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