A political impasse; economy falls into recession; BCRP to start cutting rates in Q2
In this analysis we focus on the current political impasse, and its consequences for economic performance and monetary policy. With gridlock in Congress and the body’s related inability to approve early elections, public pressure may play a greater role. We argue that there are four possible outcomes: President Dina Boluarte stays until July 2026; early elections are approved in the next Congress; Boluarte resigns; or street protests force Congress to call a referendum on redrafting the Constitution.
Although it is difficult to assign a probability to each possible outcome, we assign a 7% probability to the first; 55% to the second; 33% to the third; and 5% to the last. Identifying potential front-runners in presidential and congressional elections would be even more of an exercise in speculation. Although the pollsters have tried to identify likely individuals, overall sentiment is that voters are disillusioned with current politicians.
Most recent high-frequency economic reports confirm that the economy entered a recession in Q1 2023. On the back of January economic reports, we have revised down our Q1 2023 real GDP estimate to -0.5% oya, from 2%, after the economy posted growth of 1.6% in Q4 2022, 1.7% in Q3 2022 and 3.6% in H1 2022. This will mark the first contraction of real GDP since the pandemic-driven recession in Q2 2020, when GDP fell by 30% oya, and the Great Recession of Q2 2009, when GDP fell 0.7% oya. On the 3-month-on-3-month, seasonally adjusted annualized comparison, real GDP is estimated to have plunged by 3.7% in Q1 2023, after advancing by just 0.1% in Q4 2022, seeing a contraction of 0.4% in Q3 2022 and averaging 3.2% in H1 2022.
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