Colombia: The economic explanation of what’s going on

The first thing you need to know about Economics –and nature, in general- is that everything is part of a cycle. Why? 

Colombia: The economic explanation

Leer en Español: Economía de Colombia: ¿qué está pasando?

What we do know, and has been reinforced by the World Economic Forum, is that every single economy undergoes a 4-step cycle.

Please keep in mind:

 Central Banks compose the setting for every economy as they dictate the interest rate, which is known as the price of money. Low interest rates kick-start the economy as borrowing money is cheaper, while high interest rates keep people away from borrowing money and boosts saving – the driver of long term growth.

Phase 1: Boom.

The first phase of the economic cycle is the “boom”. It occurs when central banks fix the interest rates near zero. When interest rates are low, people will expand their credit, the economy will flow in-site and morale among society boosts.

As parties at an economy that are constantly receiving money, the central bank may raise the interest rates periodically, infecting the short-term debt for long-term investments.

Right now, the United States of America is undergoing a Boom cycle. Interest rates are rising from zero progressively. The bull market –when things go up- has passed its historic levels and perspectives about business are good.

Colombia’s largest recent “boom” came in 2010.

Phase 2: Stagnation

The aftermath of the “boom” is stagnation. Interest rates are high, most of the good deals are taken, and even if a bubble is not formed, inflation has risen.

Inflation means more money –deriving from consumption credit among others- is flowing through the economy even if it’s not backed by new production. Bills from a credit card advance or salary work count the same when you go to the grocery store.

Colombia is passing through the end of its stagnation cycle as interest rates reverted their upward trend on the 27th of February 2017 when they passed from 7.5% to 7.25%; this trend has continued to this day where interest rates sit at 5.25%.

Phase 3: Recession

Note: this hits harder when no substantial savings have been done.

The good deals are gone. The promises made to lenders in the boom cycle start to work against those who were optimistic at one point. Now that inflation is high and the struggle to keep up with debts is rising, the central bank is lowering interest rates so consumption is promoted.

Colombia is passing through this phase right now, interest rates will continue to decrease until the economic imbalances are fixed and inflation comes back to its equilibrium. Unemployment is subtle to increase.

 

Keeping in mind that Colombia is undergoing the outcome of an aggressive 3% tax increase in all basic goods, this recession is felt hard, no ending time can be prognosticated, as there is no control –or knowledge- of external factors.

Phase 4: Recuperation

Recuperation starts when unemployment levels are at a maximum. Now interest rates are low again and usinesses start opening. If inflation is too high, Central Banks can use negative interest rates to include the levels of inflation. Colombia has never seen this practice done, but countries like Japan have.

The last time Colombia had a” recuperation” behavior was on the 26th of March, 2013 as interest rates lost their lowering momentum and reached a minimum of 3.25% and then kept rising until December 19th 2016 where they tipped towards 7.50%

 

Then the cycle may start again.

 

 

Latin American Post | David Eduardo Rodríguez Acevedo

Copy edited by Susana Cicchetto

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