Venezuelan Trade Dilemma: Lift GDP or Lower Inflation?
The Economist Intelligence Unit’s Latin American team reports Venezuelan GDP has slowed to 1.1% in the third quarter from 2.6% in the second quarter.
The EIU analysts are particularly struck by a third-quarter contraction in Venezuelan imports of goods and services of 16.1% year on year reported by Banco Central de Venezuela. While the Venezuelan government has talked about boosting imports to ease shortages of consumer goods and food staples, it appears to have put a brake on imports to keep overall growth positive and avoid balance of payment problems. If Venezuelan imports hadn’t contracted in the third quarter, the country’s GDP would have shrunk 7.4%, says the EIU.
Our Venezuelan data (covering imports of goods through May and exports of goods through June 2013) confirms downward trends in the value of trade in both directions (see the charts below). Venezuela has also been changing trade partners, with the US and Colombia ceding share as China has gained.
Venezuelan President Nicolas Maduro is using the extraordinary powers granted him by the National Assembly on November 16 to decree price cuts and other deflationary measures, as MercoPress reports here and here.
Nonetheless, economics dictate a stark choice: Restrict imports to lift GDP and, along with it, inflation. Or open the flow of imports, easing shortages and deflating prices, but also slowing GDP growth.
Given the trade trends – and assuming the downward pressure on imports continues – the EIU expects Venezuela’s inflation rate will exceed its current forecast of 64% in 2014.
As the 2007-13 trend charts show, Venezuelan-Colombian trade relations never quite recovered from the countries’ 2008 trade war. Read about it here:
Date posted: November 30, 2013