Growth remains healthy in 2015 despite slight deceleration

Growth remains healthy in 2015 despite slight deceleration

March 16, 2016

Following a slight deceleration in the first two quarters of 2015, the economy of Central America and Caribbean region gained strength in the second half. In the third quarter, the economy expanded 3.0% on an annual basis and projections show that the positive momentum probably carried over into the final quarter of the year with GDP expanding 4.2%. The acceleration in the second half reflects improvements across the board. Last year, the region benefited from faster growth in the U.S, which lead to higher remittances and a boost in tourist spending. Moreover, low oil prices supported growth as the region is a net importer of hydrocarbons.

Looking at 2015 as a whole, preliminary estimates for GDP show that Guatemala’s economy expanded 4.1%, which was down from 2014’s increase but still marked a relatively high growth rate. The slight deceleration reflected lower government spending. The Dominican Republic’s economy also decelerated moderately from 2014’s seven-year-high reading and grew 7.0% in 2015. Elsewhere in the region, Panama’s economy slowed to 5.8% growth in 2015 on the back of poor performance of the country’s all-important service sector. An advance estimate shows that the Central America and Caribbean region grew 3.2% last year, which was marginally below 2014’s 3.3% increase. 

Read the most recent update on Central America & the Caribbean

Outlook stabilizes for the second consecutive month

This year, Central America and Caribbean will continue to benefit from the gradual recovery in the U.S and the region will likely grow faster than Latin America, which is expected experience another year of recession in 2016. In March, the economic outlook for the region was left unchanged from last month's projection. The economic analysts we polled this month see the region’s GDP increasing 3.1% in 2016. Analysts kept their forecasts unchanged for 9 of the 12 economies surveyed, including the Dominican Republic, El Salvador and Nicaragua. Conversely, the GDP forecast was cut for Guatemala, Puerto Rico and Trinidad and Tobago. In 2017, the Central American and the Caribbean region is expected to grow 3.2%.

Panama is expected to be the region’s fastest-growing economy in 2016, with the country’s GDP expanding 6.1%. The Dominican Republic will likely be the second-fastest economy with a projected 5.2% growth rate. Conversely, Puerto Rico will be the worst performer as its economy is expected to contract by 0.8%.

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COSTA RICA | Country’s credit rating downgraded amid deteriorating fiscal situation

The Central Bank of Costa Rica announced that the fiscal balance swelled from 5.7% to 5.9% of GDP in 2016. The news came amid warnings from the OECD and the International Monetary Fund that if the government does not implement a fiscal adjustment policy this year, it will jeopardize its long-term fiscal sustainability. Against this backdrop, Standard & Poor’s (S&P) credit ratings agency downgraded Costa Rica from BB to BB- with a negative outlook. S&P commented that the fiscal situation continues to deteriorate and that the economy is facing a growing debt burden and rising interest payments. S&P is certain that the government will not address the issue appropriately as 2017 is its last full year in office and a fragmented Congress makes an agreement highly unlikely. S&P is the second credit ratings agency to downgrade Costa Rica’s rating so far this year as the fiscal situation continues to deteriorate.

The economy is expected to accelerate on the back of a continued U.S. recovery, domestic monetary stimulus and real credit expansion. A persistently-large fiscal deficit and rising public debt, however, do pose downside risks to the outlook. Analysts see the economy expanding 3.7% in 2016, which is unchanged from last month’s projection. The panel foresees GDP growing 3.8% in 2017.

DOMINICAN REPUBLIC | Economy records impressive growth in 2015 due to strong domestic demand

The Dominican Republic’s economy, supported by strong macroeconomic fundamentals, continues to perform well. GDP expanded 7.0% in 2015, which was the second-highest reading in five years and was slightly below the increase recorded in 2014. Domestic demand boosted growth as increasing employment and low oil prices supported higher disposable income, while the recovery in the U.S. provided tailwinds via increasing tourist arrivals and foreign remittances. The resulting increase in private consumption was paired with outstanding growth in private investment, particularly in the construction sector, which recorded an 18.2% expansion in 2015. In the political arena, presidential elections are scheduled for 15 May. It is likely that incumbent President Danilo Medina, from the Dominican Liberation Party, will be reelected. His main opponent is opposition leader Luis Abinader from the Modern Revolutionary Party.

The economy is set to continue expanding in 2016, albeit at a slower rate than in 2015, against a backdrop of dissipating external tailwinds. Despite an improving outlook for the all-important agricultural sector, a slowdown in dynamism in fast-growing sectors like construction will put a lid on overall economic performance. Analysts expect the economy to grow 5.2% in 2016, which is unchanged from last month’s projection. For 2017, the panel projects GDP to increase 4.5%. 

GUATEMALA | Strong household spending sustains growth in 2015

Economic growth ticked down a notch from 4.3% in 2014 to 4.1% in 2015. The moderate slowdown mainly came on the back of low public spending, which registered the first contraction in over a decade partly due to limitations in tax collection, and a weak performance of the external sector. On a positive note, household spending, sustained by record-high remittances, picked up notably and fixed investment also improved. More recent data paint a mixed picture at the outset of this year. Economic activity decelerated for a third consecutive month in January, recording the smallest expansion in almost two years, which points to a loss of dynamism in the economy. However, strong remittances in the first two months of the year bode well for private consumption. In fact, February saw the largest remittances inflows in over eight years.

The economy is projected to slow this year, as 2015’s drought will likely hamper this year’s agricultural output and low commodity prices are expected to drag on the value of exports. On top of this, uncertainties regarding Guatemala’s future political path pose a downside risk. FocusEconomics panelists expect that the economy will grow 3.4% in 2016, which is down 0.1 percentage points from last month's projection. In 2017, the panel expects GDP growth to inch up to 3.5%.

PANAMA | Growth prospects remain positive on the back of robust public investment

The Panamanian economy grew 5.3% annually in the last quarter of 2015, marking a deceleration from the 5.7% growth tallied in Q3. The economy lost steam in the full year 2015 as it decelerated to a 5.8% rise—the slowest growth rate since 2010. The economic headwinds Panama’s regional peers are facing had an impact on GDP growth as the all-important services sector contracted. Nevertheless, the economy is expected to remain resilient: the mining and quarrying component expanded notably in Q4 and construction tallied double-digit growth. The government resumed construction on large-scale infrastructure projects that had been stalled and plans to start new large-scale constructions in 2016 are underway. Against this backdrop, Fitch credit ratings agency confirmed Panama’s rating and outlook. Fitch confirmed that the economy will remain robust on the back of public investment and increased revenue from the Panama Canal expansion, which is expected to open in the first half of this year.

Ongoing strength in Panama’s diverse service-oriented sectors and substantial public investment will continue to foster growth going forward. Analysts expect the economy to expand 6.1% in 2016, which is unchanged from last month’s projection. For 2017, the panel forecasts growth of also 6.1%.

INFLATION | Regional inflation eases slightly in February

According to a preliminary estimate, inflation in the Central America and Caribbean region inched down in February. A FocusEconomics estimate shows that inflation in the region eased slightly to 3.0% from January’s 3.1%, which had marked the highest reading in a year. Inflationary pressures will likely remain contained this year. Forecasters polled by FocusEconomics this month see inflation ending 2016 at 2.8%, which is unchanged from last month’s forecast. The panel kept the forecast unchanged for 7 of the 12 economies surveyed, including the Dominican Republic, El Salvador, Puerto Rico and Jamaica. Guatemala was the only country for which analysts raised their inflation forecast, while the forecasts for four other countries including Nicaragua and Panama were cut over last month’s forecast. Panelists expect regional inflation to accelerate and end 2017 at 3.1%. 

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Written by: Dirina Mançellari, Senior Economist

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