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.
During the 2Q2024, economic growth was driven by the rebound of primary sectors, such as traditional agriculture and fishing, and by higher public spending, supported by an estimated increase of 11% in public wages and 16% in public investment, adjusting for inflation.
During the month of August, attention was focused on the dynamics within Congress. In view of the election of the Board of Directors and the recomposition of the ordinary commissions, numerous movements were recorded in the benches.
Although the implicit alliance between the Executive and the Legislative remains in force, in recent months we have seen a progressive weakening of the Executive.
