Consumption in Costa Rica

Costa Rica - Consumption

Economic growth rebounds in Q1 on stronger public and private consumption

In the first quarter of 2019, the economy grew 2.3% compared to the same quarter a year earlier. This represented a marked acceleration from the fourth quarter of 2018, when the economy expanded just 1.4%, which marked the lowest growth rate since Q1 2013.

Private consumption increased 1.9% in Q1, up from 1.5% in Q4, likely on a drop in the unemployment rate to 11.3% from 12.0% in Q4. On the other hand, private spending in Q1 was undoubtedly weighed on by a fall in consumer confidence; consumers in Q1 were the most pessimistic since at least September 2002, according to the University of Costa Rica. Government consumption, for its part, grew 1.5% in Q1, contrasting Q4’s 3.5% decrease. Fixed investment, meanwhile, slumped 0.8% in Q1, due largely to lower private construction investment, contrasting Q4’s 1.7% growth.

Growth in exports of goods and services decelerated to 4.1% in Q1 from 6.2% in Q4. This was due to a sharp slowdown in the exports of goods, while those of services grew at a robust rate. Imports of goods and services, meanwhile, grew 5.1% in Q1, substantially up from Q4’s 1.4% increase and driven by a surge in service imports. Overall, the external sector detracted 0.3 percentage points from economic growth in Q1, contrasting its 1.6 percentage point contribution in Q4.

Turning to the coming quarters, businesses will have greater certainty about the policy environment following the approval of fiscal reforms late last year, which should support fixed investment growth and sustain an economic acceleration. These included swapping the general sales tax for a value-added tax and tightening the rules for government spending increases, all of which fully come into force over this year. In addition, a weak colón following its steep depreciation at the end of last year, coupled with the opening of a new industrial port in Limón in February this year, should stimulate exports. However, continued instability in neighboring Nicaragua and global trade protectionism could undermine export potential ahead.

The Central Bank expects the economy to expand 3.2% in 2019 and 3.0% in 2020. Our panelists, however, are slightly less optimistic and expect growth of 2.8% in 2019, which is unchanged from last month’s projection, and 2.8% again in 2020.