Ecuador: Contraction in recession-hit Ecuador eases in Q2
October 3, 2016
The Ecuadorian economy performed slightly better in the second quarter, the result of gradually improving oil prices and an increase in crude output. The economy shrank a notable 2.2% in Q2, compared to the same quarter last year, which was above the record-low revised 4.0% contraction recorded in Q1 (previously reported: -3.0% year-on-year). Nonetheless, many of the country’s economic woes carried over into the second quarter. The appreciation of the U.S. dollar continued to take its toll on Ecuador’s dollarized economy. The inability of the Central Bank to devaluate the currency hit export competitiveness in non-oil sectors and added downward pressure on wages and public spending. As such, all growth components decreased in Q2 apart from exports, which rose at the fastest pace since March 2014.
The silver lining was the noteworthy performance of the external sector in the second quarter, despite the burden of a strengthened dollar. Exports grew 6.1% in Q2, which contrasted the 3.0% decline in Q1 and reflected slightly higher prices for oil and increased efficiency in the Esmeraldas refinery. Conversely, weak consumer demand drove another fall in imports, which decreased a stark 13.3% in Q2 (Q1: -15.0% yoy). This resulted in the external sector’s contribution to growth rising from plus 3.6 percentage points in Q1 to plus 5.4 percentage points in Q2.
On the domestic side of the economy, the contraction in total consumption eased in the second quarter, logging a 3.9% drop (Q1: -4.9% yoy). Contractions in both private and public consumption were behind the result, dragged down by crumbling state revenues and severe austerity measures. Private consumption recorded an annual decline of 4.7% in Q2 (Q1: -5.5% yoy) and public spending fell a milder 0.4% in the same quarter (Q1: -1.9% yoy). Fixed investment plummeted 17.6% in the second quarter, which was an even worse contraction than Q1’s 14.7% drop. Q2’s plunge in fixed investment reflected floundering public finances and scarce interest from foreign investors, which more than offset a gradual recovery in oil-related investments.
On a sequential basis, the economy finally expanded after contracting for four consecutive quarters. GDP rose 0.6% in seasonally-adjusted terms in Q2, which was a notable rebound over the 1.6% decrease observed in Q1. Looking forward, still-subdued oil prices will continue to weigh on employment, government consumption and fixed investment. Nevertheless, a gradual recovery of these, coupled with the ramping up of several oil projects in H2 and a moderate boost provided by the reconstruction project should prompt a belated return to positive annual growth.
Author: David Ampudia, Economist