Costa Rica: Economic growth slows to a near six-year low at the end of 2018, hit by large public protests
March 29, 2019
In the fourth quarter of 2018, the economy grew 1.4% compared to the same quarter a year earlier. This represented a marked deceleration from the third quarter’s revised reading of 2.5% (previously reported: +2.4% year-on-year) and the weakest growth since Q1 2013. Large public protests related to fiscal policy reform from early-September to mid-December likely hit economic activity.
There was a broad-based deterioration in domestic demand in Q4. Private consumption growth decelerated to 1.5% from 1.7% in Q3, as a large increase in the unemployment rate, a weak increase in loans to the private sector and downbeat consumer confidence all likely dragged on consumer spending. Moreover, the cash-strapped government slashed spending by 3.9%, representing a larger decrease than the third-quarter’s 0.1% reduction, while fixed investment grew a meager 1.7% (Q3: +5.6%).
Growth in exports of goods and services decelerated to 4.0% from 4.5% in Q3; imports, meanwhile, contracted 0.4%, less severely than Q3’s 2.5% decrease. Overall, the external sector contributed 1.5 percentage points to economic growth in Q4, down from the 2.5 percentage-point contribution in Q3.
Turning to this year, following December’s approval of fiscal policy reforms—which included swapping the general sales tax for a value-added tax and tightening the rules for government spending increases—domestic businesses now have greater certainty about the environment in which they operate. This should support fixed investment growth and help the economy accelerate going forward, while foreign investors are also likely to have greater confidence about investing in Costa Rica. In addition, a projected depreciation of the colón and February’s opening of a new industrial port in Limón should stimulate demand for Costa Rican exports, which would further boost the economy. However, exports could be undermined by continued instability in neighboring Nicaragua.
Author: Edward Gardner, Economist