Ecuador: Economy grows at the weakest pace in one-and-a-half years in Q2
October 1, 2018
Ecuador’s economy lost steam again in the second quarter, with annual GDP growth falling to 0.9%, down from 1.6% in the first quarter as the government’s austerity drive restrained the pace of expansion through weaker domestic demand. This was the slowest pace of expansion since Q4 2016. In quarter-on-quarter terms, however, the economy grew 0.4% in Q2, contrasting a 1.0% contraction in Q1.
A comprehensive breakdown of the headline figure shows that the slowdown in domestic demand was driven by a fall in fixed investment growth from 4.0% in the first quarter to 2.4% in the second quarter. Less favorable financing conditions stemming from a deceleration in private credit growth was likely behind the cooling in investment. Despite planned fiscal adjustment, growth in government spending accelerated, from 1.2% in Q1 to 3.9% in Q2. Private consumption also sped up amid deflation and low levels of unemployment, growing 3.3% in Q2 following a 2.6% expansion in Q1.
The external sector continued to drag on growth. While exports and imports both lost pace in the second quarter, imports surged ahead of exports. Exports grew a meagre 0.2% in Q2, down from 1.3% in Q1. Meanwhile, imports expanded 8.6% in Q2, down from 9.7% in Q1.
While higher oil prices should continue to support the recovery, growth is expected to weaken from last year due to the impact on activity from President Lenín Moreno’s long-awaited fiscal consolidation program. Ecuador’s dollarized economy, which relies heavily on external financing to service a weighty debt load, was hard hit by the strengthening in the U.S. dollar in Q2, driven by the U.S. Federal Reserve’s decision to hike interest rates and escalating trade tensions. This resulted in a notable increase in borrowing costs for Ecuador, with market sentiment towards emerging markets in general taking a dive and leading to capital outflow. Dollarization and low international reserves mean the economy will not be able to run a significant fiscal deficit.
Author: Nihad Ahmed, Economist