Consumption in Costa Rica

Costa Rica - Consumption

GDP contracts at a softer rate in Q3

The economy shrank again in the third quarter, although at a notably softer pace than in the second (Q3: -7.2% year-on-year; Q2: -8.9% yoy). Q3’s result is the second largest GDP contraction on record, and reflects an economy still hurting from the pandemic and associated containment measures.

Domestically, the improvement was broad-based. Household spending led the upturn, contracting at a notably milder pace in the third quarter than in the second (Q3: -5.7% yoy; Q2: -10.7% yoy). However, the unemployment rate remained high in the quarter, likely capping private consumption somewhat. Similarly, fixed investment contracted at a considerably softer pace in Q3 than in the previous quarter (Q3: -0.4% yoy; Q2: -2.7% yoy). Meanwhile, government consumption swung to a mild expansion in the third quarter from a slight contraction in the second (Q3: +0.6% yoy; Q2: -0.1% yoy).

Turning to the external sector, exports of goods and services contracted 14.7% in annual terms in the third quarter, softening from Q2’s 21.4% dive. Similarly, imports of goods and services decreased at a more moderate rate in the third quarter (Q3: -10.1% yoy; Q2: -16.4% yoy), likely as a consequence of improving domestic demand in the period.

Moving to the final quarter of 2020, available data shows that economic activity continued to contract in October and November, albeit at the softest pace since March. Our panelists see the economy shrinking further in Q4 and in the first quarter of 2021, although the rate of contraction is set to gradually ease, before rebounding later in the year. Downside risks stem from fresh Covid-19 restrictions imposed in the final months of 2020 and from the current wide fiscal deficit.

Reflecting on downside risks to the outlook, Pamela Ramos, economist at Oxford Economics, noted:

“A high debt service burden, impending austerity measures and limited confidence are expected to weigh on domestic demand in the medium term, with the economy unlikely to return to the pace of GDP growth seen in the previous decade. […] [In 2020], the economy will inevitably suffer from the measures taken to combat the pandemic and the global economic crisis it has induced. We expect a contraction of 4.8% in 2020, with the economy only recovering to its pre-coronavirus level in mid-2022.”

FocusEconomics panelists see the economy expanding 3.2% in 2021, which is down 0.1 percentage points from last month’s projection, and growing 3.5% in 2022.