Over the past two months, we have observed several signs suggesting that the global and local economy have begun to recover gradually. This positive news is mainly explained by the beginning of economic reopening processes. This recovery, however, is “fragile”, as there are many risks that could slow it down.
First, the recent upsurge of COVID-19 cases in some parts of the world (such as the U.S. and China) could dampen the recovery of the global economy, as new restrictions to productive activities are adopted. A widespread setback in the economic reopening process would reduce the demand for Peruvian exports, affect economic growth prospects, and could trigger an outflow of capital from Peru.
In second place, on the local front, significant political risks could seriously affect economic growth in the upcoming months and even years. As a matter of example, the draft law seeking to suspend interest payments to financial entities, and the high level of rejection of “perfect suspension of labor” requests could trigger the bankruptcy of companies and generate significant drops in formal employment. This is added to the fact that social unrest has increased dramatically, further increasing the risk of a populist candidate being elected president in 2021. The anticipation of this risk could generate further drops in business confidence and reduce this year’s private investment even more.
In third place, the slow execution of public spending could affect the recovery of aggregate demand, which could grow less that expected. The government’s bet to accelerate public spending focuses, as of now, on the “Arranca Peru” program and the application of the Government to Government (G2G) mechanism to the Reconstruction with Changes program (RwC). However, there are numerous factors that could limit progress in these programs in the remainder of the year.
Finally, it is important to recall that the risk of the intensification of the health crisis in Peru persists, and that this could hinder the process of economic reopening. In conclusion, looking forward, the speed of economic recovery is still very uncertain. A quick economic recovery will need the government to be effective in stopping unfavorable regulations and accelerating public spending.
Last month, we identified four pieces of good news for the business environment: (i) lower prices of certain imported goods, (ii) lower political risk, (iii) improved business confidence, and (iv) some stabilization in local financial variables.
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After a challenging start of the year, characterized by social conflicts and heavy rains, the Peruvian economy has begun to show signs of recovery, albeit at a slow pace.
