Economy slows in the first quarter

GDP growth returns to long-run trend: GDP growth moderated to 3.8% year on year in Q1 (Q4: +4.6% yoy), matching the pre-pandemic 10-year average. On a seasonally adjusted quarter-on-quarter basis, economic growth waned markedly to 0.2% in Q1, following the previous quarter's 1.6% increase and marking the worst reading since Q2 2020.

Momentum cools across the board: The downturn was broad-based, with growth in private consumption, public spending, fixed investment and exports all slowing. Domestically, household spending growth fell to 3.1% in Q1 (Q4 2024: +3.4% yoy), marking the joint-weakest expansion since Q4 2022 amid rising consumer prices. Moreover, public consumption growth softened to 1.0% in Q1 (Q4 2024: +1.8% yoy). In addition, fixed investment growth moderated to 4.3% in Q1, following 12.9% recorded in the prior quarter. On the external front, exports of goods and services growth fell to 4.7% in Q1 (Q4 2024: +6.2% yoy), marking the worst reading since Q3 2023. Goods exports slowed while the downturn in services exports softened slightly from Q4; sustained colón strength has weighed on tourism activity in recent quarters, with companies calling for the Central Bank to cut rates to regain competitiveness. Meanwhile, imports of goods and services growth slowed to 4.8% in Q1 (Q4 2024: +7.3% yoy).

Economic growth to soften ahead: Our Consensus is for the economic growth to ease further in Q2, as sustained colón strength remains a drag on the tourism sector and a 10.0% U.S. tariff on Costa Rican products hampers exports. In 2025 as whole, GDP growth should decelerate from 2024; slowing real wages will keep a lid on private spending. That said, public spending and fixed investment are seen improving. Risks are skewed to the downside and mostly surround the U.S. tariffs. Rising domestic insecurity hurting investment and tourism is an additional downside risk.

Panelist insight: Analysts at the EIU commented on the outlook: “We had already intended to lower our real GDP growth forecast for this year in our next outlook, from the current level of 3.6%, owing to our expectation of diminished demand for exports and a sentiment-driven hit to investment. As we expect growth in the second and third quarters to be slower than that in the first, the weak outturn in January-March means that we will knock 0.1-0.2 percentage points off our GDP forecast. We therefore expect a slower pace of growth than the 3.6-3.8% that the BCCR projects.”

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