Ecuador: Growth picks up in Q3 after the weakest reading in one-and-a-half years in Q2
January 2, 2019
Ecuador’s economy accelerated slightly in the third quarter, with annual GDP growth edging up to 1.4%, from the second quarter’s 1.2% year-on-year expansion—the slowest since Q4 2016. The gains made in Q3 were powered by an upturn in the external sector underpinned by a marked rise in export growth. In quarter-on-quarter terms, the economy’s pace of expansion strengthened to 0.9% in the third quarter, up from a 0.6% expansion over the previous quarter in Q2.
A detailed breakdown of the headline print shows a continued slowdown in domestic demand which lost pace for the fourth consecutive quarter. There was an across-the-board deterioration on the demand side. Private consumption grew at a weaker rate of 2.6% in Q3, down from 3.2% in Q2, as a tighter availability of credit and the return of inflation at the end of the quarter dampened households’ purchasing power and prompted a reduction in spending. The rate of government expenditure also lost steam, falling from 3.9% in the second quarter to 2.3% in the third quarter, due to the intensification of fiscal consolidation efforts. A hefty debt burden has been accrued owing to a heavy reliance on external financing over the years, especially via loans-for-oil deals. Moreover, there was a drop in fixed investment growth from 2.7% in Q2 to 1.6% in Q3 as firms invested less in machinery, equipment and other electrical appliances, and manufactured products.
In contrast, the external sector showed some improvement in the third quarter as exports picked up, primarily overseas sales of petroleum after oil production was ramped up in the quarter to cash in on the continued climb in oil prices. Export growth rose to 1.1% in the third quarter, from 0.4% in the second quarter. Meanwhile, growth of imports tumbled sharply from 8.1% in Q2 to 3.9% in Q3.
Growth is expected to moderate going into 2019 as President Lenín Moreno’s fiscal consolidation program will likely dampen economic activity. Moreover, a strengthening U.S. dollar—driven by the U.S. Federal Reserve’s decision to hike interest rates and easing global trade tensions—poses challenges for the dollarized economy due to the accompanying rise in borrowing costs, given its dependency on external financing to service its hefty debt load. Dollarization and low international reserves limit the economy’s ability to run large fiscal deficits. The growth outlook also continues to be marred by the risk of capital outflows from deteriorating market sentiment towards emerging markets. While measures are underway to close the fiscal gap, the economy might be hard-pressed to achieve its 2019 financing plan without IMF assistance.
Author: Nihad Ahmed, Economist