Ecuador GDP Q3 2016


Ecuador: Contraction in GDP eases in Q3

December 29, 2016

The Ecuadorian economy is showing signs of a weak recovery. GDP decreased 1.6% annually in the third quarter of 2016, which was better than the 2.2% decline seen in the second quarter and the highest reading in a year. The improvement was supported by higher oil prices and a pick-up in both crude and crude-related output. Nevertheless, the dollarized economy was still beset by manifold issues. A strong U.S. dollar and devaluations in neighboring countries’ currencies continued to erode Ecuador’s competitiveness in non-oil sectors, weighing on both the country’s labor market and export volumes. Coupled with still-low oil prices and reconstruction efforts following April’s earthquake, the government continued to prioritize spending, dragging on public investment and consumption. Against this backdrop, all components of growth continued to decrease in Q3, despite many of them doing so at the weakest rate seen in a year.

Looking in detail at the components, the more moderate decrease seen in the third quarter was the result of a smaller drag from the domestic sector. Private consumption declined by 1.2% year-on-year in Q3, well above Q2’s revised 3.7% drop (previously reported: -4.7% yoy). Despite a floundering labor market and severe austerity measures, easier access to credit supported household spending in the third quarter. Conversely, government consumption, hit by dwindling revenues and mounting interest expenses, decreased at the strongest pace in almost 15 years (Q3: -4.4% yoy; Q2: -2.5% yoy). The government’s fiscal woes also impacted fixed investment, which dropped 4.2% in the July-to-September period. This was, however, the best reading in five quarters and a marked improvement from Q2’s 16.5% plunge.

On the external side of the economy, exports declined 0.3% in the third quarter, in stark contrast to the 5.0% expansion seen in Q2. However, weak consumer demand caused imports to drop again in Q3 (Q3: -3.2% yoy; Q2: -12.1% yoy). This allowed the external sector to retain a positive contribution to growth, which came in at 0.8 percentage points in Q3, but was notably below Q2’s 4.8 percentage points.

On a quarterly basis, Ecuador’s economy grew 0.5% in seasonally-adjusted terms, which was slightly below Q2’s 0.7% expansion but a notable improvement from the 0.2% drop registered in the same quarter of the previous year. Looking forward, higher oil prices on the back of OPEC’s agreement to curtail production, coupled with the recent implementation of a FTA agreement with the European Union, will boost the country’s exports in 2017. This, in turn, should alleviate pressure on the state’s coffers, giving the government increased leeway to ease austerity measures and put the country back on the path to growth. Nonetheless, uncertainty remains high ahead of Ecuador’s parliamentary elections, set to take place on 19 February.

Panelists participating in the LatinFocus Consensus Forecast see GDP contracting 0.3% in 2017, which is down 0.3 percentage points from last month’s projection. For 2018, they expect GDP to decline a softer 0.8%.

Author:, Economist

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