Central America: Economic Snapshot for Central America & the Caribbean
July 11, 2018
Growth momentum eases in the first quarter
A comprehensive set of data shows that the economy of Central America and the Caribbean lost steam in the first quarter of the year, with growth at 1.8%, down 0.3 percentage points from last month’s estimate and below Q4 2017’s 2.7% figure. However, excluding Puerto Rico, which is experiencing a deep recession, Q1’s growth figure would have only been marginally down from the final quarter of last year.
Several of the region’s big hitters lost steam in Q1. Costa Rica’s performance was negatively affected by a continued contraction in fixed investment, which was likely influenced by political uncertainty in the run-up to elections, and rising concern regarding the gaping fiscal deficit and high public debt. In Guatemala, growth was dragged down by a smaller expansion in private consumption, likely driven in part by less rapid growth in remittances. In addition, Panama’s economy notched the worst reading in several years on a broad-based slowdown, with ebbing momentum in the construction; manufacturing; and transportation, warehousing and communications sub-sectors.
Among the region’s smaller economies, the performance was mixed. Growth in Jamaica continued to pick up, aided by a surge in activity in the mining and quarrying sector as production resumed at a key refinery. However, more fundamental factors were also at work: Multi-year low unemployment likely aided private consumption, while solid growth in tourist numbers should have boosted the external sector. El Salvador’s economy also sped up, buoyed by strong private consumption growth on healthy remittance inflows. In contrast, Honduran economic growth decelerated, with government consumption constrained by a more cautious fiscal stance adopted as part of a recently concluded IMF assistance program.
Looking to the second quarter, economic growth is expected to have increased slightly. Costa Rica and Guatemala likely regained momentum following unexpectedly soft Q1s. In Costa Rica, reduced political uncertainty following a victory for establishment candidate Carlos Alvarado in the presidential elections should have supported business sentiment, while Guatemalan economic activity readings for April and May suggest a pick-up in growth. The Dominican Republic likely had another stellar quarter, with the economy continuing to benefit from strong credit growth and lower lending rates. In contrast, Panama’s performance appears to have been hit by a month-long strike that paralyzed construction activity, leading the government to announce an injection of fiscal stimulus to return the country to its hitherto impressive growth trajectory.
On the political front, social instability in Nicaragua continues to brew. The death toll is racking up, and dialogue between President Ortega and civil society appears stuck. In late June, the Central Bank put economic losses to date at over USD 400 million, a figure which will only rise until an orderly solution to the conflict is reached.
Regional growth projection revised down as panelists react to soft Panama data and political unrest in Nicaragua
Going forward, economies throughout the region will continue to benefit from fiscal stimulus in the U.S—by far Central America and the Caribbean’s largest trading partner—which should in turn continue to boost remittances, exports and tourist arrivals. In addition, the Puerto Rican economy should gradually begin to recover from the aftereffects of Hurricanes Maria and Irma heading into FY 2019, as the power grid comes back online and federal government aid swells. However, as CENAM is a net oil importer, higher international oil prices will weigh on the region’s external sector. Key downside risks stem from faster-than-expected monetary tightening by the U.S. Federal Reserve—which would weigh on regional credit growth, investment and private spending—and a tougher U.S. immigration policy, which could disrupt remittance inflows. Citizens from El Salvador, Haiti, Honduras and Nicaragua currently residing in the U.S. are already set to see their Temporary Protected Status end within a few years, which could lock many of them out of the U.S. labor market.
FocusEconomics panelists expect regional GDP growth of 2.0% this year, which is down 0.1 percentage points from last month’s estimate. This was largely driven by a downgrade to Panama’s growth forecast after tepid economic activity readings in the January–April period. In addition, panelists continued to slash Nicaragua’s growth forecast, as the extent of economic disruption from the ongoing unrest becomes clear. Honduras and Jamaica also saw their projections cut slightly. Conversely, the GDP forecast for the Dominican Republic was revised upwards following the continuing recent string of positive economic data, as was Trinidad and Tobago’s forecast. Projections for the region’s remaining economies were unchanged. Regional GDP growth is seen accelerating to 3.7% in 2019.
The Dominican Republic and Panama are expected to log the fastest growth in the region this year, with both countries expanding at a rate equal to or above 5.0%. Conversely, Puerto Rico is expected to be the region’s worst performer, recording a contraction of 8.0% in FY 2018.
GUATEMALA | Economy decelerates in Q1, but appears to have picked up speed in Q2
Economic growth slowed to a multi-year low in the first quarter on the back of softening domestic demand. Despite a rise in income levels and robust remittances growth, private consumption lost steam in the quarter, while public expenditure growth nearly halved. Meanwhile, fixed investment growth remained virtually unchanged from the prior quarter. The external sector fared poorly, with both exports and imports contracting markedly in the quarter. Looking at Q2, the economy should have accelerated somewhat as remittances growth was particularly strong in the first two months of the quarter: In April, remittances increased by more than a fifth over a year ago, while they reached the highest USD value on record in May, boding well for private consumption. Moreover, the Central Bank’s monthly economic activity index showed that the average reading trends higher in Q2 than the quarter prior.
Domestic demand is expected to propel the economy this year. Robust labor market developments and strong remittances growth should support private consumption, and infrastructure spending will likely spur government expenditure. However, downside risks stem from potential political and economic uncertainty leading up to next year’s presidential elections. FocusEconomics Consensus Forecast panelists expect the Guatemalan economy to expand 3.2% this year, unchanged from last month’s estimate, and 3.3% in 2019.
DOMINICAN REPUBLIC | The economy continues to fire on all cylinders heading into H2
The economy grew at an impressive rate in Q2, according to recent indicators. Elevated economic activity growth in the first two months of the quarter was driven by manufacturing in duty-free zones, construction and commerce, with the economy benefitting from robust private sector credit growth and lower average interest rates. In addition, tourist arrivals were solid in May on greater inflows from North America. On the fiscal front, the non-financial public sector posted a small surplus in the year to May, while tax revenues exceeded expectations. This comes after growth surged in the first quarter, buoyed by monetary stimulus introduced from the middle of last year.
Growth is set to be the joint-strongest in the region this year. The economy should be buoyed by continuing robust credit provision and fiscal stimulus in the U.S., which will boost remittances, exports and tourism activity. However, elevated debt servicing costs and a narrow tax base pose downside risks, which could become more pressing with higher oil prices and as global financial conditions tighten. FocusEconomics panelists expect GDP growth of 5.1% in 2018, which is up 0.1 percentage points from last month’s forecast. For 2019, panelists see the economy expanding 4.4%.
PANAMA | Growth slumps in the first quarter, but economic fundamentals are solid
Comprehensive data confirmed that the Panamanian economy shifted into a lower gear in Q1, with growth slowing to an over seven-year low. The print was dragged down by sluggish growth in the construction sector and in trade-related sectors such as ports. Economic growth in the second quarter is expected to have remained constrained due to a month-long labor union strike that ended on 18 May and brought the country’s construction sector to a grinding halt. Despite challenging economic conditions, S&P Global Ratings upgraded Panama’s outlook from stable to positive and left the country’s credit rating unchanged at BBB on 2 July. The credit rating agency applauded the government’s prudent fiscal management, as well as efforts to improve transparency in the country’s financial sector.
Growth in 2018 is expected to be constrained by the impact of the labor union strike and culmination of large-scale infrastructure projects. Next year, growth should pick up as construction activity increases, and the opening of a large copper mine supports strong growth in the mining sector. The possibility of a global trade war, which could disrupt trade flows and impact the country’s service sectors, is a key downside risk. FocusEconomics Consensus Forecast panelists project that the economy will grow 5.0% in 2018, which is down 0.4 percentage points from last month’s forecast. They expect GDP will expand 5.2% in 2019.
COSTA RICA | Fiscal reform remains vital to long-term economic stability
The economy got off to a slow start in 2018, with year-on-year growth moderating to an over four-year low in the first quarter. Fixed investment fell for the fourth consecutive quarter, which was likely due to political uncertainty and higher interest rates. However, healthy private consumption supported the expansion in the first quarter, despite increased unemployment and pessimism among consumers. Government consumption was also robust in the first three months of the year, while the external sector boosted the economy, due to fast-growing exports and shrinking imports. On 18 June, the IMF acknowledged the importance of ongoing efforts in Costa Rica to improve the country’s fiscal standing, such as the fast-tracked bill currently making its way through the Legislative Assembly. The Fund urged Costa Rica’s authorities to implement fiscal reforms as soon as possible.
Increased political certainty following the election of Carlos Alvarado as president in April and strong demand from key export markets such as the United States should support economic growth this year and next. However, despite recent legislative efforts, a persistent fiscal deficit and high public debt will weigh on prospects. Our analysts expect GDP to grow 3.4% in 2018, unchanged from last month’s projection, and 3.5% in 2019.
INFLATION | Inflation broadly stable in May
According to a comprehensive estimate produced by FocusEconomics, regional inflation was 3.4% in May, down 0.1 percentage points from April’s figure. Lower inflation in Costa Rica, El Salvador, Haiti, Honduras, Jamaica, and Puerto Rico was partially offset by higher inflationary pressures in Belize, the Dominican Republic, Guatemala and Nicaragua. Preliminary data for June signals that inflation in the region stabilized at May’s 3.4%.
Regarding regional monetary policy, the Bank of Jamaica cut rates by a further 50 basis points in June following a rate cut in May, in an effort to breath more life into economic activity and support inflation, which is currently tracking below the 4.0%–6.0% target. In contrast, the Central Bank of Trinidad and Tobago increased rates in late June in response to tightening by the U.S. Federal Reserve. Other central banks that held meetings over the last month stayed put.
Inflation in Central America and the Caribbean, a net energy importer, should be supported this year by higher international oil prices. Our panel sees inflation coming in at 3.3% in 2018, which is unchanged from last month’s estimate. In 2019, Consensus Forecast panelists expect inflation to remain stable at 3.3%.
Written by: David Ampudia, Senior Economist