The Peruvian middle class increased in 2021 to 30.6% of the population after the drop registered with the pandemic, but still far from the percentage of 2019 (39.2%), according to the Peruvian Institute of Economy (IPE), which estimates that it will take the country a decade to recover the figures prior to the pandemic.
In this way and according to the calculations of the IPE, this estimate will be fulfilled if the Gross Domestic Product (GDP) grows at an average rate of between 2% and 2.5% each year, and even in a more optimistic scenario such as the recent projection of the Ministry of Economy and Finance for the period 2022-2025 (3.4%), the recovery would be in seven years. For their part, BBVA Research analysts suggest that activity is losing momentum relatively quickly, which is why they expect growth to be around 2% this year.
The IPE understands by middle class the definition used by the World Bank Institute. That is, daily per capita income adjusted for purchasing power parity at 2011 prices between $13 and $70.
In this way, and as a result of the pandemic, 4.2 million Peruvians left the middle class. However, in 2021, 1.5 million managed to reintegrate with the differentiated recovery of the economy and incomplete recovery of the labor market. This increase is mainly due to the increase in extraordinary income due to the release of private funds, explains the chief economist of the IPE, Victor Fuentes, to elEconomista. However, “the use of these funds is unsustainable and with a weakened labor market, the consolidation of the middle class faces severe risks in 2022.”
Yet there are still 2.7 million people who have not been able to return to the level of well-being they experienced before the pandemic.
low quality employment
The slow progress of the recovery in this sector would be linked to “the greater precariousness of employment”, which means more informal employment and less adequate employment, something that failed to reduce during most of 2021.
In 2021, the economy managed to grow 13.1%, although compared to 2019, it was barely 0.9% above the pre-pandemic level. However, the labor market shows an incomplete recovery.
The drop in real wages for the middle class reached its lowest point in 12 years in 2021, reaching “close to 15% below 2019 levels,” Fuentes points out. In addition, at this stage there was an increase in the participation of extraordinary sources of income such as withdrawals from private pension plans, which compensated for nearly three quarters of the loss of resources resulting from the fall in wages.
The quality of employment and the loss of business confidence, causes of the mismatch
In this way, and limited to the city of Lima – an area that is further behind in the normalization of employment than the rest of the country – in April the Employed Economically Active Population (PEAO) continued to increase rapidly in year-on-year terms (9 .5% in January, 15.2% in February, 19.5% in March, and 22.9% in April), registering 942,000 more employed than a year ago, according to the latest Macroeconomic Analysis of Peru by BBVA Research .
However, the quality of jobs in Lima, the figures reveal that the recovery is very slow. The underemployment rate remains around 45%, well above the 2019 average. As a result of the greater participation of lower-quality jobs, wages do not recover, which, added to high inflation, places the real salary income (corrected for inflation) decreasing in year-on-year terms and 15% below the pre-pandemic situation. With this, the real wage bill, a reflection of the purchasing power of families, continues to lag behind.
business trust
These prospects for the recomposition of the middle class will not be favorable as long as the deterioration of business confidence persists, which does not allow the conditions to invest and create quality jobs. In this sense, it should be remembered that business confidence fell again, from 39 points in March to 34 in April (entering the pessimistic zone).
Likewise, the country, like the rest of the world, has high inflation that hinders economic growth. In April, inflation in Metropolitan Lima was almost 8%, the highest figure in 24 years, and well above the target range established between 1% and 3%.
However, and despite the fact that it is fundamentally based on international factors, the IPE estimates that local factors –such as the climate of local political uncertainty and the growing social conflict– explained between 20% and 25% of inflation during the second semester 2021. Despite this, inflation is expected to converge again to the target range in mid-2023, there is much uncertainty regarding external factors that may affect said trajectory
Fuentes estimates that the advances in the last 30 years in Peru have been as important as the challenges that are currently pending. “Improving social well-being in Peru requires achieving greater labor productivity that ensures better jobs and higher wages. Given this, it is essential to ensure a favorable climate for investment, both private and public,” he points out. “Additionally, the execution of public investment also registers a negative trend under the current administration as a result of the appointment of less than suitable senior management officials. On average, President Castillo changed a minister every 11 days in the 10 months that he has been in government “says the chief economist of the IPE.
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