Central America: Regional economic growth decelerates in Q1

Central America: Regional economic growth decelerates in Q1

July 13, 2016

The economy of the Central American and the Caribbean region decelerated to the slowest pace of expansion in three years in Q1. While the economy performed robustly last year, mainly supported by strong private consumption and an improvement in the region’s trade and tourism sectors, recent data show that the region’s economy lost some ground in the first quarter. GDP expanded 2.7% over the same quarter of the previous year, which marked a deceleration over the 3.0% increase tallied in the final quarter of 2015.   

Q1’s deceleration came on the back of slowdowns in economic activity in the majority of the economies in the region, with the exception of Costa RicaHonduras and Jamaica, which accelerated slightly. Looking at individual countries, in the first quarter, the economy of Panamadecelerated sharply and GDP increased at the softest pace in two years amid a weak expansion in the industrial and agricultural sectors. Despite Q1’s deceleration, Panama’s economy remains resilient and the recent opening of the Panama Canal and related projects are expected to boost economic activity through the creation of thousands of new jobs. Disappointing developments were also recorded in other major countries such as Guatemala, where growth was almost halved in Q1 amid a deceleration in the construction sector. 

Read the most recent news on the Central America region here

2016 and 2017 outlook stable again in July

The region’s economy will likely decelerate slightly this year, even though growth will still be robust thanks in part to a gradual recovery in the U.S. and relatively-low oil prices. This month, the GDP growth outlook for Central America and the Caribbean did not change for the second consecutive time after last month. Our panel expects the region’s economy to expand 3.0% this year. The economic outlook was left unchanged for 7 of the 12 economies surveyed, including Guatemala and Puerto Rico. On the other hand, GDP projections were downgraded for BelizeEl Salvador, Panama and Trinidad and Tobago. The economy of the Dominican Republic was the only one for which the outlook was revised up. The regional projection for 2017 also remained stable with GDP expected to increase 3.1%.

Panama will be the fastest-growing economy of the region this year and its GDP is projected to expand 5.8%. The Dominican Republic and Nicaragua will likely see the region’s second- and third-fastest rates of growth this year. At the other end of the spectrum, Trinidad and Tobago and Puerto Rico will be the worst performer as its economy is expected to contract 1.7% and 1.3%, respectively.

Get the Full FocusEconomics Central America & Caribbean Report  

COSTA RICA | Growth accelerates in Q1 amid strong external sector

Costa Rica’s economy posted its strongest growth in nearly three years in Q1 2016 with a 4.8% annual expansion. The result was driven by strong growth across the economy, although the country’s external sector was the highlight; it contributed positively to growth for the first time in five quarters. Imports fell while exports saw a significant increase on the back of solid improvements in both goods and service exports. Recent data are supportive of a continued recovery in exports, as the trade deficit was significantly smaller in the first five months of the year compared to the same period last year. On the other hand, monthly output ticked down in April as the ongoing slowdown in the mining and extraction industry represents a soft spot in the Costa Rican economy.   

Costa Rica’s growth prospects are linked to its fiscal imbalances. The fiscal deficit has been elevated since the financial crisis and will continue to restrain growth until fiscal consolidation and revenue collection measures are implemented. Analysts expect the economy to expand 3.7% in 2016, which is unchanged from last month’s projection. The panel foresees GDP growing 3.9% in 2017.

DOMINICAN REPUBLIC | Economy remains robust in Q2

The Dominican economy expanded at a vigorous rate in the first quarter of 2016, supported by the healthy performance recorded in the service sector. The good economic momentum carried over into the second quarter, as evidenced by the latest monthly indicator for economic activity, which showed that the economy expanded at a strong pace in May, accelerating slightly over April’s result. According to the Central Bank, the expansion came mainly on the back of solid growth in the construction, financial and manufacturing sectors. Moreover, the latest data on tourism show that tourist arrivals continued to grow at a healthy pace in May. On 29 June, Moody’s upgraded its outlook for the Dominican Republic from stable to positive, citing as reason the good growth prospects.

In 2016, the Dominican economy will grow robustly, though it will lose some steam compared to 2015. Analysts expect the economy to grow 5.6% in 2016, which is up 0.2 percentage points from last month’s projection. For 2017, the panel projects GDP to increase 4.6%. 

GUATEMALA | Resilient economic developments drive upward revision to the country’s credit outlook

The resilience of the Guatemalan economy was underlined when Moody’s changed the outlook for the country’s rating in June from negative to stable. The negative outlook had been assigned during the uncertainty surrounding last year’s political crisis, which presented a substantial downside risk to the economy, however the impact on the economy was muted. Moody’s stated that the widespread corruption that initiated last year’s crisis is expected to improve as a UN-backed political watchdog group has effectively persecuted a number of corrupt officials. Recent data indicate that growth in economic activity continued to pick up and remittances, which have been a key element in Guatemala’s economic growth, exhibited strong growth in May. Moody’s noted that strengthening of the country’s political and economic institutions could eventually result in an improvement in its credit rating.  

Given that remittances make up nearly a tenth of GDP, Guatemala’s economy is particularly susceptible to external risks, particularly in the U.S. However, growth in the U.S. appears healthy and the Fed’s normalization of monetary policy is likely to be more protracted than previously envisioned, which bodes well for Guatemala’s economy. FocusEconomics panelists expect that the economy will grow 3.5% this year, which is unchanged from last month's projection. Next year, the panel expects the economy to expand 3.6%.

PANAMA | Opening of the Panama Canal expansion bodes well for growth

Sluggish global trade caused GDP to decelerate to a multi-year low in 2015. Subdued global trade drove the economy to a two-year low in Q1 as the agricultural and service sectors contracted. Nevertheless, the opening of the expanded Panama Canal on 26 June guarantees that the economy will be resilient. The government estimates that fiscal transfers from the Canal will increase 45% starting in 2017 and that investment in related infrastructure such as ports will increase by 40% in the medium term. In a special report assessing the impact of the expanded Canal, Fitch Ratings said that increased earnings from the Canal offer a unique opportunity for the government to reduce public debt levels and consolidate its fiscal position. The agency noted that a credit rate hike could take place if the government achieves the two aforementioned points. 

Panama’s diverse service-oriented sectors and substantial public investment will keep external headwinds at bay and foster growth. However, flagging global demand and deteriorating trade dynamics weigh on the outlook. Analysts expect the economy to expand 5.8% in 2016, which is down 0.1 percentage points from last month’s projection. For 2017, the panel forecasts growth of 6.0%. 

INFLATION | Inflation eases slightly in May  

Inflation in the Central America and the Caribbean region inched down from 2.8% in April to 2.7% in May, thus hitting the lowest reading in five months. Compared to the previous month, inflation was lower in most of the countries in the region, including the Dominican Republic and Panama. Conversely, inflation increased in other countries such as Guatemala and Nicaragua. A preliminary estimate for June elaborated by FocusEconomics shows that regional inflation likely remained stable at 2.7%. Looking forward, inflationary pressures are expected to remain broadly stable this year.

The July Consensus Forecast for inflation in 2016 is in line with last month’s forecast. The Consensus still sees inflation tallying 2.5% this year. Forecasts were unchanged for 5 of the 12 countries in our survey, including Nicaragua and Panama. On the other hand, forecasts were downgraded for five economies including the Dominican Republic and Guatemala. El Salvador and Haiti were the only economies that saw their inflation estimates revised up this month. For next year, our panelists expect regional inflation to accelerate slightly to 3.1%. 

Get the Full FocusEconomics Central America & Caribbean Report

Written by: Dirina Mançellari, Senior Economist

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