Ecuador: Economy slows markedly in Q1 amid drive to strengthen fiscal metrics
July 3, 2018
Ecuador’s economic recovery lost considerable ground in the first quarter, with the economy growing at a substantially weaker pace compared to the preceding quarter: Annual GDP growth slowed to 1.9% in Q1, down from 3.0% in Q4. Moreover, in quarter-on-quarter terms, the economy contracted 0.7% in the first quarter, contrasting a 1.2% expansion in the previous quarter. A marked slowdown in the domestic economy and a deterioration in the external sector were behind the downturn.
Looking at a breakdown of the figures, domestic demand lost steam, growing at an annual pace of 3.9% in the first quarter compared to 4.8% in the previous quarter. Government consumption slowed notably (Q1: +1.3% year-on-year; Q4: +4.3% yoy), owing to the administration’s plans to cut back on public spending with a view to strengthening fiscal consolidation. Household consumption also rose at a more moderate stride, rising 4.6% in Q1 compared to 5.6% in Q4. On the upside, fixed investment growth shot up to 5.5% in Q1, mainly thanks to a double-digit surge in machinery, equipment and electrical appliances, following a 1.4% expansion in the previous quarter.
While exports made some gains from the previous quarter, the external sector continued to drag on growth as imports shot up. Exports grew 1.1% in Q1, following a milder 0.4% expansion in Q4. On the other hand, imports surged 8.4% in Q1, marking a notable climb from the 6.9% rise in Q4. Thus, the external sector deducted from growth as imports raced ahead of exports.
While higher oil prices should continue to support the recovery, growth is expected to lose ground from last year due to the impact on activity from President Lenín Moreno’s long-awaited program of economic adjustment aimed at fiscal consolidation. Moreover, the plan envisages a wider role for the private sector in the infrastructure, oil, energy, mining and telecoms sectors through public-private partnerships, which is hoped will generate USD 7 billion investment by 2021 and raise USD 1.6 billion for the public purse. A high level of indebtedness poses risks to the economy’s financial stability. The economy is heavily reliant on external borrowing to service its big debt burden; much of it is owed to China through loans-for-oil deals. This, combined with fewer import controls, has been draining international reserves and could prevent a speedier and sustainable recovery.
Author: Nihad Ahmed, Economist