This is how a recession in the United States will affect the Salvadoran economy.

El Salvador will not escape the impact of the U.S. recession, three Salvadoran economists said, with exports and remittances the main sectors affected.

A recession occurs when GDP records two consecutive quarters of contraction. In 2023, there were fears that the world’s largest economy would enter a new phase of declining growth due to monetary policy, but it managed to escape.

Alarms have been raised about a possible recession in the United States after employment levels in July did not grow as analysts had expected. Added to that is rising interest rates in Japan, which had a domino effect on the rest of the global stock markets and caused Wall Street to close in the red on August 5.

Although these are preliminary forecasts and the US government has the resources to “maneuver” the situation, economist Rafael Lemos said the situation has increased the chances of recession for the largest US banks, JP Morgan and Chase.

In the event of a recession, Lemos noted that remittances and exports would be the main beneficiaries, due to the weight the United States plays in every sector for El Salvador.

Salvadorans in the United States sent 92.9% of the $4,052 million in remittances that entered El Salvador during the first semester, according to the Central Reserve Bank.

At the level of goods, the Central Bank indicated that during the first half of 2024, $3,209.3 million worth of goods were exported, of which 34.5% was acquired by the United States, the main trading partner.

Most of the goods purchased from this country were imported, specifically 29.03% of the total of more than $7,789.1 million.

domino effect

The dependency relationship between El Salvador and the United States has been evident on previous occasions. The president of the Central American Development Foundation (FODECIN), Oscar Cabrera, pointed out that the US economy is facing a slowdown, a situation that has affected Salvadorans.

“This slowdown that was observed in the United States, we are already seeing in the evolution of the VAT in El Salvador, we have already seen how the VAT has slowed down rapidly and this is explained primarily by the decrease in consumer spending by 100%,” Cabrera added.

The index of economic activity volume (IVAE) fell to -0.92% in April 2024. The variable recovered by May, but by only 0.03%. For Cabrera, this figure represents a zero increase.

Business associations also confirmed that the decline in demand from American consumers is one of the main factors that caused the overall shipments of goods to decline by 6.7% year-on-year in the first half of 2024.

Impact on consumption

Cabrera noted that the recession will affect import levels in the same way, because companies will have to get fewer inputs for production.

“20% of households receive family transfers, so income will fall, affecting household consumption spending,” said a Vodicin spokesperson.

Transfers are essential for a part of the population whose household consumption depends on the manipulation of this source of financing, which Alfonso Goitia, economist at the College of Professionals in Economic Sciences (Colproce), considers a “central axis” of population consumption.

Cabrera and Goitia agree that a recession in the United States will also push down growth in the Salvadoran economy, which has grown at between 2% and 3% in recent years.