Costa Rica: Economic growth slows in the first quarter
June 29, 2018
The economy grew at the slowest rate in three years in the first quarter of the year, according to GDP data released by the Central Bank on 29 June. In non-adjusted terms, the economy grew 2.6% in Q1 2018 compared to the same period a year earlier, down from 3.1% in Q4 2017, mainly because of a weak performance in fixed investment.
Private consumption increased 2.7% in Q1 year-on-year, matching the expansion recorded in Q4. This came despite an increase in unemployment to 10.3% from 9.3% in Q4, according to the National Institute of Statistics and Census of Costa Rica, and continued economic pessimism among consumers, according to the University of Costa Rica. Meanwhile, government consumption dynamics were also unchanged in Q1 from Q4, with growth stable at 2.9%. Fixed investment contracted 4.1% in Q1 compared to the same period a year earlier (Q4: -5.5% year-on-year). This represented the fourth consecutive quarter of falling fixed investment and was likely due to political uncertainty in the run-up to this year’s elections and higher interest rates.
Year-on-year growth in exports of goods and services accelerated to 5.4% in Q1 from 1.8% in Q4. Imports of goods and services contracted 2.1% Q1, contrasting the 3.0% growth recorded in Q4. Because of these dynamics, the external sector contributed 2.7 percentage points to economic growth in Q1, an upward swing from the 0.5 percentage-point deduction in Q4.
Looking ahead, the economy will be significantly affected by what the newly elected president and politicians can do to reduce the fiscal deficit. In 2017, the deficit grew to 6.1% of GDP, the largest on record. If the government can pass reforms through the politically fractured Legislative Assembly to manage spending and raise revenues, investors should become more confident about reaching into their pockets, supporting fixed investment. One such reform is the bill for the Strengthening of Public Finances, which has been making its way through the assembly for more than two years now. It was recently granted a fast-track by politicians due to the widely acknowledged urgency of the fiscal situation.
Author: Edward Gardner, Economist