Central America Economic Forecast

Economic Snapshot for Central America

January 18, 2017

Key economies decelerate in Q3 2016

Following a deceleration in the first half of 2016, preliminary estimates show that growth remained broadly stable in the third quarter. GDP expanded 3.0% on an annual basis, which was up from the second quarter’s 2.7% rise. The region likely performed better than Latin America last year, as it benefited from the recovery of the U.S. economy. This was reflected in higher remittance inflows and exports for the region. That said, there are escalating concerns that the stricter immigration policies of U.S. President-elect Donald Trump will negatively affect the region, in particular countries that are highly dependent on the remittance flows from the U.S.

Taking a closer look at the key countries in the region, in the third quarter, the economy of the Dominican Republic slowed and expanded at the slowest pace in over three years as weaker expansions in construction and manufacturing took a toll on growth. Moreover, in the same quarter, Costa Rica’s GDP growth slowed from the second quarter’s impressive increase and Panama’s economy failed to capitalize on the additional earnings generated by the expanded Panama Canal that opened in late June 2016. Among the other big economies, in Q3, Guatemala expanded at the slowest pace since Q3 2012 as the tense political environment hindered investment. On a positive note, Jamaica’s economy improved conside rably and Belize’s GDP contracted less in Q3.

Analysts keep 2017 GDP growth forecast on hold

Economic growth is expected to slightly accelerate this year from the 2.9% projected for 2016. Our analysts expect GDP to expand 3.1% in 2017, which is unchanged from last month’s estimate. This month, growth estimates were revised down for four countries including the Dominican Republic and Puerto Rico. Forecasts were revised up for Belize, Costa Rica and Guatemala, while they were left unchanged for the other five countries. Our analysts expect growth to inch up to 3.2% in 2018.

Panama will be the fastest growing economy this year with an expected growth rate of 5.7%, followed by the Dominican Republic and Nicaragua, in that order. In contrast, the economies of Puerto Rico and Trinidad and Tobago are expected to be the worst performers. 

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COSTA RICA | Economy likely decelerated in Q4 2016

The Costa Rican economy performed relatively well in 2016 thanks to robust private consumption and resilient fixed investment. Sector-wise, the economy was propped up by a solid rebound of the agricultural and manufacturing sectors, while services continued to expand. However, recent data confirm that growth momentum took a hit at the start of H2 as GDP decelerated in Q3. The country’s fiscal imbalances will continue to be at the center of the policy debate. Important steps were made last year with the approval of some measures that will allow public spending to be reduced. Although those steps represented an improvement over previous fiscal rules, a great deal of measures—such as revenue collection measures and the introduction of a Value-added Tax—are still pending.

The slowdown seen in Q3 2016 is likely to worsen this year. The important fiscal consolidation will continue to hamper domestic demand and public investment in particular. However, solid private consumption will contain the deceleration. Analysts expect the economy to expand 4.0% in 2017, which is up 0.1 percentage points from last month's forecast. For 2018, the panel expects GDP growth of 3.9%.

DOMINICAN REPUBLIC | Growth outpaces its regional peers in 2016

The Dominican economy is expected to have grown at the fastest pace in the region last year, on the back of the strong expansion recorded in the mining, construction, tourism and agricultural sectors. The economy was also supported by a substantial increase in remittances, especially from the Dominican diaspora in the U.S., the most important source of foreign remittances for the country. In spite of this, in the third quarter the economy decelerated from the impressive growth reading recorded in Q2, mainly on the back of a weaker expansion in industry, though this suffered from a very high base effect. The latest monthly data suggest the economy is experiencing a further deceleration in growth, as the rate of expansion in tourist arrivals decelerated in both October and November. 

This year, economic activity should remain robust but growth will moderate. The fading of the stimulus effect of low oil prices and tightening financing conditions, due to the Fed’s planned interest rate hike, are expected to restrain both private consumption and fixed investment. FocusEconomics analysts expect the economy to expand 4.9% in 2017, which is down 0.1 percentage points from last month’s forecast. For 2018, the panel projects that GDP will increase 4.5%.

GUATEMALA | Stricter U.S. immigration policy threatens the economy this year

The Guatemalan economy lost momentum in the third quarter of last year, as investment growth sagged amid a still uncertain political environment. Data for Q4 indicate that the economy likely ended the year on a higher note. The Central Bank’s economic activity index edged up to 3.1% year-on-year in November from 3.0% in October, which mainly reflected increases in manufacturing, transport, financial services and agriculture, among other sectors. Meanwhile, remittances, which account for almost 10% of GDP, continued to grow in December at a much faster pace, reaching USD 679 million—the highest remittance inflow in 15 years. On 30 December, President Jimmy Morales announced a minimum wage increase of around 6.0%.

A stricter U.S. immigration policy following Trump’s victory could disrupt the flow of all-important remittances to Guatemala. FocusEconomics Consensus Forecast panelists forecast that GDP will grow 3.7% in 2017, which is up 0.1 percentage points from last month's estimate. In 2018, the panel expects also GDP growth of 3.7%.

PANAMA | Economy slows in Q3 2016

Panama’s fast-growing economy has been hampered by a slowdown in maritime trade and a challenging scenario in the region. Q3’s growth moderated as output was dragged down by a slowdown in the country’s all-important service sector. The print underscores the external headwinds the small open economy is facing as the revenues generated by the expanded Panama Canal since its June opening have dissapointed. The latest indicators suggest that the economy closed the year in a soft patch and likely expanded in 2016 at the slowest rate since 2009. Economic activity in October decelerated compared to the previous month. Cargo tonnage in Panamanian ports and Panama Canal earnings dropped in annual terms by over 10.0% and 3.0% respectively in the January to October period.

Economic growth is expected to accelerate this year on the back of the construction of large-scale infrastructure projects and an increase in Panama Canal revenues. Risks are tilted to the downside as weakening global trade and growing uncertainty abroad could dampen growth prospects. Analysts expect the economy to expand 5.7% in 2017, which is unchanged from last month’s forecast. For 2018, growth is expected to remain steady at 5.7%.

INFLATION | Inflation stable in November     

Inflation was stable in November at the previous month’s 2.3%. The figure marked the joint slowest pace in nearly a year. Lower inflation in four countries, including Panama, offset higher inflation in five economies, including Costa Rica and Honduras. A preliminary estimate for December shows that inflation likely inched up to 2.4%.

Our January Consensus Forecast estimates inflation of 3.1% this year, which is unchanged from last month’s estimate. For 2018, inflation is expected to increase to 3.4%. 

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Written by: Dirina Mançellari, Senior Economist

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