Although experts and industrialists believe that Ecuador’s economy is stagnant and will remain so for the next few months, the Central Bank believes that a recovery phase will begin in July.

In a recent interview, the manager of the Central Bank of Ecuador (BCE), Guillermo Avellán, says that the recession period of the economic cycle began in January 2024 but already ended in June 2024. What would be expected from now on would be a period of recovery.

The ECB manager explains that there are two ways to measure the health of the economy. One way to measure a recession is that the Gross Domestic Product (GDP) accumulates two or more quarters of negative results or decline. But this view only measures the production of an economy, says Avellán.

A second method is through the business cycle, which includes more variables besides production, such as employment or credit distribution. This methodology allows one to measure whether the economy is growing compared to the expected forecast in the long term.

“This business cycle method allows us to anticipate a deterioration in economic activity and take measures to counteract a potential crisis in time,” argues Avellán.

Hence, in the methodology of the economic cycle, a recession process can include economic growth, but it does not reach the expected potential increase.

However, economic experts believe that Ecuador has not yet reached the lowest point of the recession phase of the economic cycle. The commercial sector, for its part, anticipates that the economy will remain stagnant in the following months. Even multilateral organizations are revising projections for Ecuador’s economy downwards.

Despite this, the ECB manager says that five factors would lead to a recovery in the second half of 2024:

• Access to financing or credit from multilateral institutions.
• Increase in public investment.
• Recovery of deposits and, therefore, credit.
• Reduction of State arrears with suppliers and local governments.
• Increase in oil and non-oil exports.

Here is the full interview with Avellán:

Analysts disagree with the ECB that the economy is in recession and instead speak of stagnation because sales, consumption, and credit have slowed down but are not yet falling. So, what is the state of Ecuador’s economy?

Guillermo Avellán: First, I would like to clarify the temporality of the study. Let us imagine that the economic cycle is a movie, and the reports are snapshots of a period with a lag, which are usually 60 and 90 days.

The photo from the first quarter of this year is not necessarily the current one.

Secondly, I would like to elaborate on the concept of economic recession. According to the National Bureau of Economic Research of the United States, which is a century-old organization specialized in studying economic cycles, a recession is defined as a significant short-term decline in economic activity and in the main economic and financial sectors in a country.

The challenge arises because the theory does not establish a single criterion for identifying a recession. There are two criteria. The first defines a recession as two or more consecutive quarters of economic contraction.

According to this criterion, the Ecuadorian economy experienced a recession in the third and fourth quarters of 2023. That recession ended in December of last year, since a positive growth rate was already recorded in the first quarter of 2024.

The second criterion is the business cycle, which is the short-term variation in production and other relevant variables in relation to the long-term growth trend of the economy. It has four phases:

• Expansion
• Deceleration
• Recession
• Recovery

So, according to the economic cycle, how has Ecuador’s economy evolved?

Guillermo Avellán: According to the economic cycle report recently published by the Central Bank and corresponding to the first quarter of 2024, the Ecuadorian economy was in a recessionary stage in the first quarter of 2024, and that recessionary stage ended in the second quarter of this year, in June.

And, starting in July 2024 or the third quarter of 2024, a recovery phase begins, which is in line with the GDP forecasts made by the Central Bank of Ecuador, which is a 1% increase for 2024.

But there is no reason to think that the scenario could change in the second half of the year. There are even experts who believe that the economy has not yet reached the lowest point of the economic recession cycle. Why do you say that we will begin a recovery phase from now on?

Guillermo Avellán: For several factors:

• Access to external financing from multilateral institutions.
• The increase in public investment announced by the Ministry of Finance for the next two months is related to the implementation of the General State Budget, especially in priority sectors such as health, education, and security. Many of the projects that are tied to international financing are in these sectors.
• Reduction of arrears, which has already been significantly achieved.
• Payment to suppliers would allow for a recovery of deposits in the financial sector and, therefore, of credit and household consumption.
• A positive evolution of oil and non-oil exports.

Specifically, in terms of deposits in the financial sector, there has already been a change in trend, and they have registered an increase greater than the growth we had been observing.

We don’t see it yet in terms of credit, but due to the growth in deposits, the idea is that it will begin to recover, and more loans can be placed.

Exporters have recently warned of a worrying slowdown in overseas shipments. Why do you expect a positive trend?

Guillermo Avellán: Exports are growing at a rate of 11% in the first five months of 2024, both oil and non-oil. Non-oil exports even grew by 4.5% in value and already exceed $9.7 billion so far in the first five months.

There are sectors that are indeed facing challenges, such as shrimp and bananas, which have declined but are offset by cocoa exports, which already exceed $1.18 billion, almost 180% growth in value in the first quarter of 2024.

Similarly, canned fish exports have grown by 21% in value and have already reached $650 million through May.

We believe that these are factors that will contribute to the recovery phase.

This will happen if there are no external factors to the government, the private sector, or the economy, such as natural phenomena, a fall in the price of oil, or a serious disease in the export sector. The current impact on banana plantations due to bacteria is still specific and not widespread.

So far, we have no evidence that such exogenous factors are likely to occur. Oil prices are likely to remain high until the end of the year.

In terms of external credits, how much more will come?

Guillermo Avellán: Around $6 billion is expected throughout 2024. Of this amount, $1.5 billion is from the International Monetary Fund (IMF), of which $1 billion has already arrived.

But, in simpler terms, what is the difference between a recession proper and a business cycle downturn?

Guillermo Avellán: In the economic cycle, when a country is below long-term growth, it is understood that we are in a recessionary process.

This does not necessarily mean negative growth figures. In fact, in recession cycles, there can be quarterly growth, but it is still considered a recession, despite the fact that there is positive GDP growth, because there are more variables than GDP that are going wrong and will worsen in the following months.

These indicators are related to employment, per capita income, household consumption, and credit placement. Some of these indicators are part of GDP, and others are not.

Why has the Central Bank opted for this methodology?

Guillermo Avellán: Because the Central Bank publishes statistics and reports to facilitate decision-making in the public and private sectors, it is therefore important to have studies that can alert when there is economic weakness.

This has made it possible to take measures to prevent the recession from extending or deepening.

Thus, the recessionary period that we have just finished in 2024 was not as deep compared to the recession experienced in 2020 during Covid-19 and also in 2015 when the price of oil fell.

Without all the measures taken, the GDP growth forecast for 2024 would not have been 1% but minus 0.8%.

Is the ECB being too optimistic that a recovery is about to begin, knowing that the ITT is about to close?

Guillermo Avellán: Ecuador’s 1% growth forecast for the economy in 2024 includes the closure of the ITT. In addition, the IMF, which is very conservative in its forecasts, projected a 0.1% growth for Ecuador’s economy in 2024.

The difference is mainly due to the growth in household consumption, which we have projected will contribute 0.6%, but the IMF expects a contraction. However, so far, we do not see a contraction of that magnitude.

Will the measures you mentioned at the beginning be enough to get out of the hole, since experts say that shock measures are required?

Guillermo Avellán: From the perspective of the Central Bank, the more the government accelerates the execution of the General State Budget in the second half of the year, the more significant the difference will be.

Will there be new operations such as gold sales?

Guillermo Avellán: No, we have not contemplated it.