Costa Rica Domestic Demand (ann. var. %)

GDP growth moderates in Q4

Preliminary data shows that GDP growth lost some speed in Q4, falling to 2.5% year on year from 2.8% in the third quarter. Q4’s reading marked the weakest reading since Q1 2021. The slowdown came on the back of a weakening external sector and restrictive monetary policy likely denting activity.

The reading was driven by slowing private consumption and export growth and a stronger contraction in public spending. That said, fixed investment contracted at a much slower rate. Personal consumption growth eased to 1.7% year on year in Q4 compared to 3.0% in Q3. Public consumption dropped at the sharpest pace since Q2 2021, contracting 2.8% (Q3: -0.6% yoy). Fixed investment contracted 1.1% in Q4 (Q3: -8.3% yoy).

Exports of goods and services growth fell to 6.5% in Q4 (Q3: +14.0% yoy). That said, imports of goods and services plunged into contraction, declining 2.2% in Q4 (Q3: +8.2% yoy).

Turning to Q1 2023, activity will likely slow further as monetary policy remains restrictive and goods exports are dented by weakening demand abroad. That said, rising tourism will boost services exports and IMF funding will support public spending. Moreover, the expansion of high-value subsectors such as medical technology and semiconductors will likely boost productive potential. Meanwhile, political instability remains a key risk in advancing the government’s economic agenda this year.

On the 2023 outlook, analysts at the EIU commented:

“The combination of high inflation, above-neutral domestic interest rates and an anaemic global economy is likely to prevent significant GDP growth in the first half of 2023. Thereafter, if consumer price inflation continues to moderate from its mid-2022 peak, we expect real wages to begin to recover. In this context, we anticipate that the BCCR will begin bringing interest rates down, auguring a stronger second half to the year. However, there remain substantial downside risks to this forecast, centred on developments in global food and fuel markets, over which Costa Rica has little influence.”