Ecuador: Ecuador falls deeper into recession in Q1
July 14, 2016
Ecuador’s economic woes intensified in Q1 when the economy of the oil-exporting nation recorded the largest contraction on record, slipping deeper into recession. GDP in Q1 shrank a steep 3.0% compared to the same quarter last year (Q4: -1.2% year-on-year), marking a third consecutive drop. The setback mainly reflects the far-reaching consequences of last year’s slump in oil prices for Ecuador’s dollarized economy, which cannot adjust to low prices for its key oil exports via a currency devaluation to alleviate some of the strain. As the currency cannot depreciate, wages and public spending are under downward pressure and all components of Ecuador’s domestic demand deteriorated in Q1. While the external sector continued to contribute positively to growth, it performed worse than in Q4, with both exports and imports deteriorating.
In Q1, total consumption recorded the largest contraction on record, falling 3.7% year-on-year (Q4: -2.1% yoy). Massive drops in both private and public consumption were behind the result, dragged down by falling state revenues and lower wages. Private consumption recorded a record annual decline of 3.9% in Q1 (Q4: -2.5% yoy) and public spending fell a drastic 3.2% (Q4: -2.5% yoy), marking the deepest decrease in over 14 years. Fixed investment continued to be impacted by the drop in oil prices, as diminished government revenues coupled with a lack of outside investor interest have resulted in lower funding for infrastructure and energy projects. Investment contracted a notable 10.2% in Q1, which was down from Q4’s 8.5% decrease.
The external sector performed slightly worse in Q1. Exports contracted at the steepest pace in over five years (Q1: -2.7% yoy; Q4: -2.4% yoy) and imports tallied the largest decline in over six years (Q1: -11.0% yoy; Q4: -10.7% yoy). This resulted in the external sector’s contribution to growth falling from plus 2.8 percentage points in Q4 to plus 2.6 percentage points in Q1.
On a quarterly basis, the economy shrank 1.9% in seasonally-adjusted terms in Q1, which contrasted Q4’s modest 0.1% increase. In annual terms, the contraction in GDP has steadily worsened since Q3 last year. Ecuador’s economic outlook is grim as the dollarized economy will continue to feel the adverse impact of low oil prices and the economic fallout from April’s devastating earthquake will heighten its struggles.