Costa Rica: Economic growth slows to an over five-year low in the third quarter
December 21, 2018
The economy grew at a substantially slower pace in the third quarter of 2018, according to the Central Bank. In non-adjusted terms, annual economic growth moderated to 1.8% in Q3, down from 3.4% in Q2 and the most downbeat expansion since Q2 2013. This was, to a large extent, due to lackluster private and government consumption.
Private consumption increased 1.8% in the third quarter, markedly down from 2.8% in Q2. The increase in the unemployment rate to 10.2% from 8.7% in the previous quarter and 9.4% in the same quarter a year earlier, coupled with a large decrease in consumer confidence, arguably led to the slowdown. Meanwhile, spending by the cash-strapped government stalled in Q3, with no substantive year-on-year change in public spending, contrasting growth of 3.1% in Q2. On a brighter note, fixed investment expanded 4.2% in the third quarter, up from 1.7% in Q2, although this was largely because of a very low base effect.
The external sector fared better. Growth in exports of goods and services accelerated to 3.5% in the quarter from 1.2% in Q2. This was primarily due to a strong expansion in merchandise shipments, while service export growth was meager. In terms of imports, there was a 3.0% contraction in Q3, contrasting the 3.0% growth in the prior quarter, in a sign of lackluster domestic demand. Overall, the external sector contributed 2.3 percentage points to economic growth in Q3, contrasting the 0.7 percentage-point detraction in Q2.
Looking beyond the third quarter, the economic picture looks mixed. Activity in the fourth quarter of 2018 was likely limp: Large public strikes protesting fiscal reform, the high joblessness rate and low consumer confidence probably dragged on private consumption growth, while the government is unlikely to have ramped up its consumption levels by any significant margin given the state of public finances. Moreover, a slowing U.S. economy could have hit Costa Rican exports in the fourth quarter. On the other hand, and despite higher interest rates following another hike by the Central Bank on 1 November, fixed investment growth is likely to be elevated in the fourth quarter due to the poor reading of the same quarter a year earlier. Looking to 2019 and beyond, the signing into law of a landmark fiscal reform bill on 3 December should help shore up the government’s weak financial standing and provide additional certainty to investors, which should eventually feed into a stronger economy.
Author: Edward Gardner, Economist