Panama: Recovery in trade-related sectors boosts GDP growth in Q1 to two-year high
June 1, 2017
Panama got off to a solid start in 2017. The small and open economy expanded a sharp 6.2% annually in Q1, the strongest rate in two years. The headline figure exceeded market analysts’ expectations of a softer 5.3% increase and surpassed the quarterly economic activity index average of 6.0%. This suggests that the economy is gaining traction after a disappointing 2016 and is once again on track to be the fastest growing economy in the region thanks to a recovery in trade-related sectors and higher Panama Canal earnings. Nevertheless, in the absence of data from the second quarter, it remains too early to tell if the strong momentum will hold up or how the latest international political developments will impact the economy.
Data released by the National Comptroller’s Office (Contraloría General de la República) showed that Q1’s acceleration was driven by a strong performance in the country’s service sector, which more than offset a mild slowdown in the secondary and a contraction in the primary sectors. The service sector, the country’s economic backbone, expanded at an over three-year high of 7.5% (Q3: +3.7% year-on-year), underpinned by a double-digit expansion in transportation, warehousing and communication and a sharp 9.5% increase in wholesale and retail trade, its best reading since Q4 2013. This was aided by signs of an incipient recovery in the Colón Free Trade Zone, the largest free trade zone in the Western Hemisphere, after the spillover of Venezuela’s economic woes and a trade dispute with neighboring Colombia had caused trade activity to collapse.
The secondary sector, on the other hand, lost steam and expanded 5.1% (Q3: +7.2% yoy), with three of the four components, including construction and mining and quarrying, growing at a softer pace. Lastly, the country’s agricultural sector contracted for the fifth consecutive time.
The strong quarterly print reflects that the country’s large infrastructure program and additional earnings generated from the expanded Panama Canal are finally bearing fruit. The recovery in international trade in the first quarter also had positive spillover effects on key sectors of the economy. These dynamics put Panama on track for a solid expansion this year, even though risks remain. Renewed disruption to global trade flows would have devastating consequences for Panama and the latest political developments in Brazil could derail its strong growth momentum by slowing the region’s recovery and denting key economic sectors such as air transport.