Investment in Guatemala

Guatemala - Investment

Economic growth accelerates notably in Q2

The economy expanded 15.1% year-on-year in the second quarter, up markedly from the first quarter’s 4.5% increase. The reading, which marked the strongest growth rate since at least 2014 when current records began, came on the back of skyrocketing domestic demand.

On the domestic front, household consumption surged 15.4% over the same period last year. This marked a notable acceleration from the first quarter’s 5.8% increase and came despite lingering Covid-19 restrictions, with healthy growth in remittances amid vast fiscal stimulus and a tightening labor market in the U.S. likely supporting spending. Moreover, capital expenditure growth more than tripled to 15.3% in Q2 from 5.0% in the first quarter, likely boosted by an improved outlook for demand and output in the period. Meanwhile, government consumption swung from a 1.2% contraction in the first quarter to a 14.5% expansion in the second.

On the external front, foreign trade weighed on the overall reading. Growth in exports of goods and services jumped to 25.7% in the second quarter from 3.1% in Q1. However, imports of goods and services expanded at a stronger pace of 43.9% in the second quarter following Q1’s 9.8% increase, further highlighting recovering domestic demand. All said, the external sector subtracted 8.8 percentage points from GDP in the second quarter, worsening from the first quarter’s 2.6 percentage-point deduction.

The economy is forecast to grow at a softer pace in the second half of this year, although this will be partly due to a less favorable base effect, and growth in remittances should continue to support private consumption. Next year, economic growth is expected to cool as the base effect fades further, but the unwinding of restrictive measures at home and abroad should sustain domestic and foreign demand. Downside risks remain amid lingering uncertainty over the course of the pandemic and the availability of vaccines.

On 3 September, the government tabled the 2022 draft budget, which sees reduced spending compared to this year amid the unwinding of fiscal relief measures. Nonetheless, the budget aims to strengthen the healthcare and education sectors, as well as security. Congress has until 30 November to approve the plan, although the process is not expected to be easy, with recent history showing the difficulties of passing a contractionary budget amid opposition from the public.

Analysts at Fitch Solutions remain skeptical regarding the government’s ability to reduce spending, adding:

“The government introduced a 2022 budget that would cut outlays by 3.3% compared to the current operating budget. However, we expect public political pressure will likely prevent the government from reining in spending. In November 2020, the country experienced its largest protests in years, amid a general backlash against proposed spending cuts in the 2021 budget. President Alejandro Giammattei withdrew the 2021 budget while the 2020 budget, which featured emergency spending due to the pandemic, remained in force. […] We expect public pressure will likely result in an increase in spending in the final budget compared to the initial proposal.”

FocusEconomics Consensus Forecast panelists expect the economy to grow 4.5% in 2021, which is up 0.3 percentage points from last month’s projection. For 2022, our panelists expect the economy to grow 3.6%.