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Costa Rica GDP Q2 2020

Costa Rica: GDP dives at sharpest rate on record in Q2

The economy shrank 8.6% year-on-year in the second quarter, swinging from a soft 0.6% expansion in the first quarter. Q2’s result marks the largest contraction on record and reflects the negative impact of the pandemic and its associated containment measures on activity.

The domestic downturn was led by a fall in private consumption: Household spending plummeted a record 11.4% in Q2 (Q1: +0.6% yoy), likely hampered by a rising unemployment rate, which shot up to 24.0% (Q1: 12.5%). Moreover, government spending decreased, albeit only slightly and at a slower rate than in the previous quarter (Q2: -0.3% yoy; Q1: -1.9% yoy). Similarly, fixed investment dropped in the quarter, although it did so at a much slower pace than in Q1 (Q2: -2.4% yoy; Q1: -8.1% yoy).

Turning to the external sector, exports of goods and services dived 20.7% in annual terms in Q2, swinging from Q1’s 2.9% increase, reflecting the damage caused by border closures and muted foreign demand. Similarly, imports of goods and services plummeted amid depressed domestic demand, albeit at a softer pace than exports (Q2: -16.2% yoy; Q1: -0.7% yoy).

Moving to the third quarter, available data suggests that economic activity contracted, albeit at a slower pace than in the second quarter, as lockdown measures were slowly eased and borders reopened. Looking ahead, our panelists see the economy shrinking further in Q4, although at a slower rate than in Q3, before rebounding in 2021. Costa Rica is in talks with the IMF to secure a USD 1.75 billion loan, which would bode well for recovery ahead.

Reflecting on the 2021 draft budget and its implications for the economic outlook, Carlos Gossmann, economist at Icefi, noted:

“In an effort to contain public spending and, at the same time, to be able to meet the high cost of servicing the debt incurred in recent years, the authorities propose a budget with few or no economic implications. While proposing an increase in resources for some tourism-oriented activities, some items in education and in health, other areas of spending will see significant reductions, including investment spending, transfer spending, etc. Given no new initiatives were taken to increase the State’s own revenue, the country will be forced to support more than half of its spending obligations with debt financing. Under this scenario the main credit rating agencies—which have already downgraded their ratings for the country in recent years and constantly highlighted the deterioration of public finances and the lack of diversification of financing sources—will perceive greater risk, further deteriorating the country’s credit profile with respect to its peers.”

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