The future growth of the Uruguayan economy

The future growth of the Uruguayan economy
The future growth of the Uruguayan economy

He Ministry of Economy and Finance (MEF) has updated the estimate of potential growth of the economy Uruguay, based on new estimates from experts consulted at the level of the Fiscal Advisory Council. These calculations are necessary to establish the goals of the tax ruleapproved in this legislature with the Urgent Consideration Law (LUC).

Last year the calculation had shown a potential GDP growth of 2.8% annually, but this year the projection dropped to 2.5%. This new calculation base will begin to be applied from 2025 and implies that primary spending cannot grow more than 2.5% in real terms annually next year (second pillar of the rule).

With the new data, it is also observed that in 2023 the GDP was 2% below what is estimated to be its potential. This is largely explained by the impact of the drought, which is considered exceptional and which brought production to a lower level than it potentially would have. It is expected that this year and next year that gap with respect to potential GDP will close and the economy actually reaches its full capacity.

Estimates of potential GDP are updated every year and incorporated into the new fiscal institutionality to isolate the effect of the economic cycle and establish a structural fiscal result goal (first pillar of the fiscal rule).

Specifically, the experts consulted by the MEF make a projection on the evolution of the gross investment in fixed capitalthe work force and the productivity total of the factors. The MEF takes the median of the responses in each of the three variables indicated, to make its projection of potential GDP.

The incorporation of these econometric calculations and the fiscal rule is a welcome improvement in the quality of the public politics. Because beyond short-term circumstances – with droughts, rains, positive or negative regional impacts, and external demand that sometimes helps or sometimes complicates – the long-term growth capacity of an economy depends on the accumulation of capital over time. through investment, as well as the contribution of work, in terms of the number of people working and the qualification of that workforce.

Regarding investment, it can be stated – in general terms – that a country like Uruguay needs levels of investment (fixed capital formation) close to 20% of GDP, to have a reasonable growth of its economy that allows it to overcome the social demands current and advance per capita income and quality of life.

GDP Investment.jpg

The attached graph shows the evolution of this indicator, which after a moment of expansion associated with the large linked projects of UPM In recent years, it has had a certain setback in 2023. In historical terms it is not a bad performance, but progress needs to be made to ensure an investment base that allows for more dynamic growth.

Regarding the workforce, in recent years there has been a employment expansion, which contributes to a higher potential GDP. However, there are pending issues here regarding the quality of people’s training at all levels, its link with the demand profile in the labor market and especially in the integration of citizens in more precarious conditions and with lower incomes at a more dynamic labor market.

This is particularly important at a time when a productive revolution is unfolding through the information technology, which forces more than ever to adjust this meeting between training and labor demand. Besides, Uruguay It is a country with a relatively small population, which is practically not growing. The latest census data show that, if it had not been for the immigration, surely Uruguay would have regressed in its population. Therefore, the contribution of the work depends almost entirely on improvements in qualification. These are the issues that, beyond the current situation, end up defining the progress of the economy in the medium and long term.

Source: Ambito

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