A well-known story by Gabriel García Márquez tells the story of a woman who at breakfast time tells her two children that she woke up with the premonition “that something very serious is going to happen to this town.” Over the course of the day, the impression goes from rumor to shared certainty and turns into collective panic, after which the inhabitants flee in terror from the place.
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In the end, while the houses burned by their owners burn so that the imagined misfortune does not spread and the exodus begins, the lady of the omen concludes: “I said that something very serious was going to happen and they told me I was crazy.” This closes a forecast that was, in itself, the cause of its coming true.
These days there is no lack of those who remember the writing of the Colombian Nobel Prize when observing the course of economic events and point out that the world is heading towards a self-fulfilling prophecy. According to this point of view, with so much talk of decline, the planet is headed for a major slowdown.
The data seems to prove them right. Federico Manicardi, of the JP Morgan bank, points out that the number of articles mentioning the word recession – defined as two consecutive quarters of negative growth – has increased 10-fold in recent months and they are approaching the maximum of the beginning of 2020, when the pandemic began.
Hence the reaction to news that, at first glance, is good. According to the US Bureau of Labor Statistics, the world’s largest economy saw an increase of 372,000 people employed last month, a figure that far exceeded analysts’ expectations.
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The report not only kept the unemployment rate at 3.6 percent – very close to historical lows – but also allayed fears about a sharp slowdown in the pace of business in the northern country. And while leaders like Joe Biden welcomed the news, the markets’ response was less than enthusiastic, with several stock indices falling rather than improving.
The reason is that those who see beyond the situation consider a new increase in interest rates inevitable aimed at cooling an engine with signs of overheating. In other words, today’s good number is a prelude to the stronger squeeze that comes tomorrow and that alters the mood of investors, something that creates turbulence that is felt in the five continents.
Whoever doubts it only has to observe what has happened in Colombia these days. The fact that the exchange rate reached the highest point in its history on Friday, reaching 4,438 pesos per dollar, is directly related to an international environment full of challenges.
warning lights
And the challenges are not part of fiction. Unlike the story at the beginning, on this occasion the dangers are real and they are the order of the day.
To begin with, inflation is skyrocketing practically everywhere, with a few exceptions, such as China. The global average that a year ago was close to 3 percent is now approaching 9 percent. As far as the most developed nations are concerned, the figure is the highest in the last four decades.
Understanding why price increases accelerated requires going back to the bottlenecks caused at the time by covid-19. While the infections caused multiple sectors to experience production setbacks, the relief programs launched by the governments prevented consumption from falling.
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As a consequence, demand remained strong while the supply of various goods experienced rigidities. When mobility restrictions began to be lifted, the gap became more evident. However, until the end of 2021, it was believed that these tensions would be temporary. Russia’s invasion of Ukraine substantially changed the outlook, as it exacerbated the scarcity of cereals, hydrocarbons and minerals.
Faced with the accumulation of pressures, there was no other choice but to dust off the well-known cookbook. Many central banks have started to raise the cost of money, something that will eventually make credit more expensive and lead people to postpone their purchasing decisions.
Ideally, moderation in consumption will bring demand and supply back into balance and everything will return to normal. That is the long-awaited “soft landing” that specialists speak of.
Unfortunately, in practice this is not so simple. To begin with, not all markets settle at the same time nor is every individual circumstance the same.
Even if the fire looks like in its beginnings, the way to put out each source of conflagration varies and is subject to the particular conditions of the terrain and the wind. In addition, the collateral effects of the situation worsening in certain areas, while in others the impact can be isolated, must be considered.
More precisely, Argentina or Turkey have a very bad time on this front, but it is more serious that the United States finds it difficult to contain the famine, because the decisions made by their authorities have repercussions on other countries. Apart from making debts more expensive, higher interest rates influence perceptions of risk and lead capital to seek refuges that they consider safer, starting with assets denominated in dollars.
That’s why Those who say that a devalued peso really doesn’t matter are wrong. The value of imported raw materials, as well as intermediate goods and finished products, affects the standard of living of the population in general.
As if that were not enough, Colombia also has a real inflationary headache that is felt most harshly by those at the bottom of the income pyramid. As the Dane made clear this week, the annualized rise in the family basket is 9.7 percent at the end of June, but for the lowest strata that index is almost two percentage points higher.
particular signs
Back to the US economy, there are several signs that things are not quite right. Apart from the fact that retail sales fell in May, consumer confidence in June was at its lowest point since it began to be measured in the last century.
Similarly, the real estate market is in the doldrums, because mortgage payments have risen and buyers’ appetite has disappeared, which also leads to the cancellation of new construction projects. In turn, stocks had their worst first half since 1970, posting a 19 percent decline on average.
Why, then, do employment and the value of wages continue to increase? Areas such as professional services or those related to restaurants and tourism continue to expand, something that in the North American case can help cushion the blow.
Much more complex is the future of Europe. Vladimir Putin himself, annoyed by the military support for Ukraine, warned last week about the damage that could be inflicted on the Old Continent if he soon cut off the supply of natural gas and cut oil shipments.
Although there is still something of a dead calm, few observers dispute that Europeans face a recession directly related to the cost of energy. The road would be more complicated if there are power rationing that would happen as soon as temperatures begin to drop in the last quarter.
With such a threat hanging over us, it remains to be seen if the central bank of the community bloc raises its interest rates in September. For now, it is clear that the euro is one of the main victims of the situation, since in the last twelve months it has fallen 14 percent against the dollar and was traded one by one on Friday.
Among the unknowns that persist, the price of primary goods appears in the forefront. Copper, which hit record highs recently, is down 20 percent from levels at the start of the year.
At the same time, key foods such as corn and wheat are far from the points reached in March and May. For the large importers of cereals, this constitutes a very welcome relief that translates into a slight change of direction in the trend of inflation..
As for oil, there are visions for all tastes. While there are those who believe that the economic slowdown will translate into lower oil consumption, others say that China has regained strength after the April restrictions to suppress the pandemic in its territory.
The most extreme insist that a squeeze on the offer is approaching on behalf of Russia. Under that perspective, the fact that the barrel has reached below 100 dollars in the last week would be a temporary anomaly, since a significant rebound seems inevitable.
Be that as it may, shocks aim to become the norm and not the exception in the coming months. The combination of economic difficulties with a particularly complex geopolitical reality does not leave much room for optimism.
To summarize it in one sentence, hard times are coming for many because global growth will be lower and interest rates will continue to rise. A group of emerging countries – in Latin America, Africa and Asia – will enter a recession, along with most developed nations, something that will hit those on the other side of the Atlantic harder than North America.
Others will win if they know how to play their cards right. Colombia could be in that group, but this will depend on whether the new government knows how to maintain the confidence of consumers and the private sector, along with that of foreign investors.
So far, the process is not progressing well at all. Beyond the messages of moderation from the Petro administration and the composition of the cabinet that will take office on August 7, headed by a finance minister who knows the trade, there are signs that the perception of political risk affects us.
To begin with, it is known that, although most currencies have lost ground against the dollar, in the case of the peso the depreciation is more extreme, something that makes servicing the foreign debt more expensive and increases pressure on the family basket. No less worrying is that credit risk –measured by what is known as five-year Credit Default Swaps– has been rising and is now similar to that of Brazil, when months ago it was comparable to that of Mexico, which is one step below.
Therefore, the next team needs to understand that the environment is challenging and the tolerance for trials with doubtful results is much lower. In this sense, some coherence in the messages would be very useful, beginning by making clear the objective of fiscal responsibility and seriousness in the fulfillment of the state commitments acquired.
If this is not the case, the voices “that something very serious is going to happen to this town” will increase in pitch. In order for the catastrophic prophecies of the García Márquez story not to come true, it will be necessary to demonstrate with facts and good policies that, despite everything, Colombia will manage to emerge gracefully from this difficult world situation.
RICARDO ÁVILA PINTO
Special for WEATHER