Stagflation in Colombia: the country could be entering one of the most frightening situations for economists
After the National Statistics Department (DANE) released the Economic Tracking Indicator (ISE) for April 2023 on June 20, 2023, and after experiencing months of high inflation, several economic analysts have begun to outline a future of stagflation in Colombia.
If this were to happen, it would mean that the country would have to face all the consequences of a generalized increase in the prices of its goods and services together with the difficulties of seeing no growth in the economy: inflation + economic stagnation.
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This was stated by Jorge Restrepo, professor of Economics at the Universidad Javeriana, who on his Twitter account posted the DANE graph of the annual growth rate of the ISE index between April 2021 (provisional) and April 2023 (preliminary) and said that “given the increase in consumer prices so far this year, above 12%, everything indicates that stagflation is among us”.
El indicador de seguimiento a la economía señala una contracción en abril. Muy mala noticia. Muy mala.
— Jorge Restrepo (@JorgeARestrepo) June 21, 2023
Además, dado el aumento de los precios al consumidor en lo corrido del año, superior al 12%, todo indica que la estanflación está entre nosotros. pic.twitter.com/31UfgLRnkw
He then emphasized that at this moment it is not possible to say that the economy decreased: “Key: this is NOT a measure of the economy or its growth. Don’t say that the economy de-grew, as some would like it to. Not yet”.
Is stagflation in Colombia already a reality?
Nevertheless, there are those who have seen stagflationary behavior in Colombia since last year.
For economic analyst Juan Pablo Fernandez, our country is walking on the grounds of stagflation since the fourth quarter of 2022 and continued on these paths during the first quarter of 2023.
To support this statement, Fernandez points out the most recent economic indicators.
“Colombia is already suffering from a stagflationary process: in the labor market the volume of unemployed is growing in recent months – although there is some rebound, the trend is downward – especially between the first and second quarter of this year.
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Growth is falling and we are already in negative territory, not only in trade and construction, but it is also spreading to all economic activities. Both general and core inflation continue to be high,” explains the expert.
The latest results of the Economic Monitoring Indicator (ISE) show that all economic activities in the country are in decline:
“The ISE indicator is a reflection of the fall in primary, secondary, and tertiary activities, and is an approximation of the behavior of the GDP (Gross Domestic Product), which shows that our economy, in general, has already entered the realm of red numbers, of negative growth”, explains Juan Pablo Fernández.
In addition to the fact that the indexes show that there could be a stagflation phenomenon in Colombia, the situation is further aggravated by inflationary pressures: “the El Niño phenomenon adds to the conditions that prevent inflation from decreasing. How big can the inflationary pressures generated by El Niño be? That will depend on the severity with which this phenomenon hits the Colombian economy”, explains Fernández.
What is stagflation?
Stagflation is a phenomenon in which high inflation is combined with economic stagnation or even decline. In order to understand whether a country has fallen into stagflation, monetary authorities classify inflation according to its origin, that is, depending on whether it is demand-led or supply-led inflation.
According to Banco de la Republica, one of the main causes for a country to experience inflation is demand-pull inflation. In this scenario, consumers, families, companies, and even the government itself are willing to buy more products than those available for sale.
This behavior tends to arise in the context of economic growth and indicates that demand in general has good purchasing power to acquire goods and services at a higher price than they were previously available, which implies that unemployment is relatively low and other income-related indices are healthy.
Nonetheless, Colombia is far from experiencing such a situation and the explanation that could be more in line with the inflation experienced by the country in the last years is the one indicated by supply-side inflation. In this scenario, there is a shortage of products and/or an increase in production costs, according to the explanation provided by Banco de la Republica.
Nonetheless, Colombia is far from experiencing such a situation and the explanation that could be more in line with the inflation experienced by the country in the last years is the one indicated by supply-side inflation. In this scenario, there is a shortage of products and/or an increase in production costs, according to the explanation provided by Banco de la Republica.
Although at this point the economic context of a country starts to become critical, it is not the worst-case scenario. The negative impact that inflation of this type has on the economy is aggravated when another situation is added: economic stagnation.
Economic stagnation can be identified when a country’s GDP stops growing or its growth is very moderate.
A scenario such as the one described above, which combines high inflation, and unemployment with economic stagnation or even economic decline, is what economists call “stagflation”.
This is what seems to be shaping up in the Colombian economy, if not already happening, as Fernandez points out.
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