Central America Economic Forecast

Economic Snapshot for Central America

June 14, 2017

Regional economy grows faster than expected in Q1

Available information for this year suggests that the positive dynamics seen in late 2016 in the economy of the Central American and Caribbean region have carried over into the first quarter. Regional growth had accelerated in the last quarter of 2016 on the back of a tightening labor market in the U.S., an improvement in global trade flows and higher commodity prices. Entering this year, growth in the Dominican Republic largely benefited from surging inflows of remittances and tourism receipts, while a pick-up in economic activity in Panama was attributed to the knock-on effects of increased trade flows. Elsewhere in Central America and the Caribbean, GDP data is not yet available for the first quarter, but high-frequency data points to a stronger performance in the region overall. FocusEconomics expects GDP to have grown 3.1% in Q1, slightly above the 3.0% estimated last month. This confirms that the economy bottomed out last year, though it is still not out of the woods.

Looking at individual countries in the region, growth in Costa Rica likely maintained its healthy pace of growth in Q1 as an improving job market shored up consumer spending. Likewise, the Guatemalan economy likely expanded at a faster clip despite heightened domestic political uncertainty. Robust export growth in Honduras and Jamaica also suggests a notable pick-up in economic activity in the January-to-March period. Even Trinidad and Tobago, the region’s worst performer last year, seems to have started to pull its weight on the back of an energy sector-led recovery.

Notwithstanding the strong start to the year, there are incipient signs that economic momentum is petering out in the second quarter. Although inflows of remittances—a key source of disposable income and foreign currency for most countries in the region—have remained at elevated levels thanks to an outstanding U.S. labor market, households in the region are starting to feel the pinch. This is largely due to tightening monetary conditions as the U.S. Federal Reserve readies itself to hike interest rates again in June and inflationary pressures mount. The spillover effects of such a scenario have had a particularly alarming effect in Costa Rica, where Central Bank officers had to unleash a wave of tightening monetary measures in late May and early June to anchor inflation and currency expectations over the medium term. 

Diverging trends keep outlook unchanged

FocusEconomics panelists left their overall projections for the Central American and Caribbean regional economy unchanged in June, following last month’s downgrade due to fiscal distress in several economies and lingering uncertainty linked to the U.S. trade and migration agenda. Our analysts expect GDP to expand 3.0% in both 2017 and 2018.

This month, GDP forecasts for 2017 were revised up for Puerto Rico but revised down for El Salvador, Haiti, Honduras and Trinidad and Tobago. They were left unchanged for Belize, Costa Rica, the Dominican Republic, Guatemala, Jamaica, Nicaragua and Panama.

The key Panamanian and Dominican economies are set to be the best performers this year, growing 5.4% and 5.2%, respectively. In contrast, Puerto Rico’s economy will shrink again in 2017 as it remains engulfed in its never-ending debt saga.   

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COSTA RICA | Economy on track to record robust growth in H1

Notwithstanding recent currency volatility, the economy looks poised to keep up last year’s healthy growth in H1 due largely to resilient consumer spending, which will have benefited from unemployment hitting an over two-year low in Q1. Although momentum in economic activity—as measured by the IMAE—slowed in Q1, growth regained traction in April on the back of a robust expansion in the services sector. In late May, following a rapid depreciation of the colón, the Central Bank intervened in foreign exchange markets to shore up the currency against the dollar in an effort to maintain exchange rate stability.

The economy will grow at potential this year on the back of healthy growth in private consumption and fixed investment. That said, ineffective governance ahead of next year’s elections is clouding the outlook as necessary fiscal tightening will be put off for another year. FocusEconomics Consensus Forecast panelists expect the economy to expand 4.0% in 2017, which is unchanged from last month’s forecast. In 2018, they see GDP growth edging down to 3.8%.

DOMINICAN REPUBLIC | Bribery probe engulfs the country’s political elite

The economy remains poised to outperform growth in the region despite waning tailwinds. Economic activity growth likely lost some further momentum in April, owing to severe rainfall and a negative base effect. Other leading data, however, showcased the resilience of the country’s economy. The current account surplus for Q1 inched higher over the same period last year on strong growth in remittance inflows, soaring tourism revenues and a strong pick-up in merchandise exports. In addition, following last year’s increase in the fiscal shortfall—the result of higher spending linked to the run-up to the elections—data for the first four months of this year point to a much more prudent management of the public budget, with a sizeable reduction in capital spending nearly halving the fiscal deficit over the same period last year. In the political arena, President Danilo Medina came under heavy fire in early June as his party became embroiled in the Odebrecht scandal after allegations of bribery were made against several high-ranking officials in his government.

The economy is expected to grow above its long-term potential for a fourth consecutive year thanks to robust FDI inflows and surging tourism revenues and remittances. FocusEconomics analysts expect the economy to expand 5.2% in 2017, which is unchanged from last month’s forecast, and 4.6% in 2018.

GUATEMALA | Economic prospects remain positive despite political noise

Despite the ongoing political turmoil, the government issued Eurobonds worth USD 500 million in early June, earmarking the proceeds for infrastructure investment. The issuance was three times oversubscribed, a sign that investors see better days ahead in Guatemala. Certainly, Guatemala’s accession to the OECD’s Development Centre and ratification of an OECD treaty on tax transparency in early June served to reassure investors that President Jimmy Morales’ government is taking the need for structural reforms seriously. These developments reinforce the overarching narrative of a slow turnaround of the economy. In May, remittances once again grew by double digits after a surprise slowdown in April.

A less stringent fiscal policy will help support faster growth this year, while continued political uncertainty at home and abroad will provide the main downside risk. FocusEconomics Consensus Forecast panelists forecast that GDP will grow 3.6% in 2017, which is unchanged from last month's estimate. In 2018, the panel expects GDP growth of 3.5%.

PANAMA | Pick-up in global trade boosts domestic economy

The country got off to a spectacular start to the year with annual GDP growth accelerating to a two-year high of 6.2% in the first quarter. The strong print reflects positive spillovers from increased international trade propelling a recovery in the country’s trade-related sectors. Earnings from the recently expanded Panama Canal provided another highlight, increasing at a double-digit rate. This bodes well for the government's fiscal consolidation efforts, replenishing the state coffers. The government reported a 0.3% fiscal surplus in the first three months of the year, underscoring its commitment to healing public finances through fiscal prudence.

Panama is set to be the fastest growing country in the region this year on the back of ongoing infrastructure projects and high Panama Canal dividends. Nevertheless, a slower-than-expected economic recovery both at global level and in the region could dampen trade and therefore the country’s growth prospects. Analysts expect the economy to expand 5.4% in 2017, which is unchanged from last month’s forecast, and 5.6% in 2018.

INFLATION | Higher commodity prices stoke inflationary pressures in April

Upward inflationary pressures continued to mount in April on the back of higher energy prices. Complete data shows that inflation inched up from 3.5% in March to 3.7% in April, the highest figure in over two years. Higher inflation was seen in the Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua and Trinidad and Tobago. Inflation eased in Belize, Panama and Puerto Rico.

Our Consensus Forecast panelists raised their inflation estimates for 2017 to 3.3%, up 0.1 percentage points from last month’s forecast. For 2018, they see inflation at 3.5%.

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Written by: David Ampudia, Economist

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