Ecuador: Economy contracts in Q3 amid collapsing domestic demand
December 31, 2015
In Q3 2015, GDP contracted 0.8% over the same quarter of the previous year, which contrasted the revised 0.7% increase registered in Q2 (previously reported: +1.0% year-on-year) and represented the slowest pace of growth since Q4 2009. Q3’s contraction was driven by falling domestic demand, which was partially offset by an improvement in the external sector’s contribution to growth. The collapse in oil prices has had far-reaching implications for Ecuador’s growth, and the dollarized economy has prevent the country from undergoing a currency devaluation that would alleviate some of the strain. Instead of a falling currency, wages as well as government spending are undergoing an adjustment, resulting in technical recession that commenced in Q2.
Q3’s contraction mainly reflected a deterioration in domestic demand. Total consumption growth fell from Q2’s 1.1% increase to a 1.4% decrease in Q3. Private consumption swung from a 1.0% expansion to a 1.4% contraction in Q3, while government consumption fell by 1.4% as well (Q2: +1.5% year-on-year), the lowest figure since Q4 2001. Fixed investment has been severely impacted by the drop in oil prices, as both diminished government revenues, as well as a lack of outside investor interest, which has resulted in funding for infrastructure and energy projects drying up. Investment contracted 8.7% in Q3, down from a 3.3% contraction in Q2, marking the lowest reading since December 2009.
The external sector provided some relief in Q3, as exports observed a modest recovery (Q3: +1.0% yoy, Q2: -0.4% yoy) and imports continued to plummet (Q3: -7.8% yoy, Q2: -3.2% yoy). This resulted in the external sector’s contribution to growth improving from plus 0.9 percentage points in Q2 to plus 2.8 percentage points in Q3.
In seasonally-adjusted terms, the economy contracted 0.4% over the previous quarter, after decreasing 0.6% in Q2, and recording flat growth in Q1. The two consecutive quarters of contraction have put Ecuador into a technical recession. The lack of exchange rate flexibility will likely extend the recession caused by the terms of trade shock into 2016.
Author: Robert Hill, Economist