Investment in Costa Rica

Costa Rica - Investment

GDP growth records slowest increase since Q1 2021 in Q3

Preliminary data shows that GDP growth lost momentum in Q3, falling to 2.4% year on year from 6.1% in the second quarter. Q3's reading marked the weakest reading since Q1 2021. The slowdown came on the back of surging double-digit inflation, a weakening external sector and as the impact of aggressive rate hikes fed through to the economy.

The downturn was broad-based, with private consumption, public spending, fixed investment and exports all weakening. Private consumption growth eased to 3.2% year-on-year in Q3 compared to a 3.4% expansion in Q2. Public consumption dropped at the sharpest pace since Q4 2020, contracting 0.4% (Q2: +8.1% yoy). Fixed investment contracted 5.7% in Q3, marking the worst result since Q4 2020 (Q2: -2.7% yoy).

Exports of goods and services growth fell to 10.5% in Q3 (Q2: +10.7% yoy). Conversely, imports of goods and services bounced back, growing 8.8% in Q3 (Q2: -6.1% yoy).

Turning to Q4, the economy is likely to moderate further as recent rate hikes weigh on activity. Elevated inflation will continue to hit real incomes and private consumption, albeit less so than in Q3. Moreover, weakening global growth will likely be a drag on the external sector. Looking further ahead, if approved, IMF funding of almost USD 1 billion will support public spending. Moreover, the expansion of high-value subsectors such as medical technology and semiconductors will likely boost productive potential, investments and exports. That said, a lack of a parliamentary majority remains a key risk to advancing the government’s economic agenda.

On the outlook for 2023, analysts at the EIU commented:

“Government spending will continue to make only a small contribution to growth, limited by Costa Rica's low ratio of tax revenue to GDP and the conditions of the [IMF program]. Although we forecast that export growth will cool in 2023 amid an economic slowdown in the US, a recession in Europe and anemic growth in China, net exports will still contribute to growth, as import growth will be slow. The return of international tourists is another factor that will support export growth.”

FocusEconomics panelists see the economy expanding 3.6% in 2022, which is unchanged from last month’s forecast, and 3.0% in 2023.