The incommensurable cost of COVID-19
COVID-19 caused a historic drop in the March Monthly Index of Economic Activity (IMACEC). The 12-month variation was -14.1%, below the consensus projection of -11%. April’s IMACEC is the worst in the history of the series. Retail sales took a historic hit in April, while the drop in industrial production was less intense. Disruptions were less noticeable in the mining sector, which is less exposed to quarantines. International trade figures in May deepened deterioration. Between March and April alone, economic activity was 7% below the same period of last year. We can only guess how long it will take for the government to start to pull back the strictest measures.
In the June Monetary Policy Report (IPOM), the Central Bank revised down its 2020 GDP growth forecast, from -2.5% to -1.5%, to a -7.5% to -5.5% range. This correction does not consider the possibility of a toughening of containment measures. We did incorporate such a possibility into our base scenario, and believe it would bring IMACEC to a low of -20% in July, for -8% GDP growth. For 2021 and 2022, the Bank's projection is based on a slow recovery, where the economy would reach pre-COVID-19 production levels only by mid-2022.
Government debt will spike in coming years, with public debt to rise from 28% in 2019 to 43% in 2022 – and likely to 50% in succeeding years. The resolution of the social crisis with the associated constitutional process is the main risk.
In the February-April moving quarter, unemployment soared to 9%. Instead of firing workers, firms are using the new Employment Protection Law that allows for work contract suspension. Unemployment relative to the "potential" labor force rose from 13.9% in February-April 2019 to 23.8% in the same period of 2020.
In May the CPI registered a monthly variation of -0.05%, the first negative May result since 2013. Core inflation measures also continued to fall. A stable exchange rate and lower aggregate demand should keep inflation in the lower part of the Central Bank's target range.
The main message of the June Monetary Policy Report (IPOM) is that, given so much uncertainty (the word “uncertainty” is used 59 times, vs. 38 in the March report) the Central Bank will seek to maintain ample liquidity, with a MPR of 0.5% for at least the next two years. This trajectory is not consistent with the rest of the IPOM’s macro scenario.
Despite the deepening COVID-19 crisis, many political actors have their eyes on the scheduled October 25th constitutional referendum. Some on the political right are arguing for yet another postponement, or perhaps even total reconsideration of the constitutional process. On the other side of the aisle, some are insisting that things move full steam ahead. Unfortunately, past experience with e-voting hasn’t been great -- and depending on such an unproven mechanism for an election as vital as this one might do more harm than good.
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