Central America: Central America & the Caribbean: Growth momentum stays solid in most countries, although Puerto Rico distorts the regional picture
June 11, 2018
Preliminary estimates suggest the economy of Central America and the Caribbean remained largely in good shape at the outset of the year, with growth expected to have reached 2.1% annually in Q1. This marks a 0.6 percentage-point downward revision compared to last month’s estimate, largely driven by a larger expected contraction in Puerto Rico, one of the region’s largest economies in nominal GDP terms. However, excluding Puerto Rico, the region’s Q1 growth figure would have seen only a mild downward revision compared to last month’s forecast.
The Dominican Republic has been the region’s standout performer so far this year, with the economy buoyed by monetary stimulus that has spurred credit growth. Following a stellar Q1 GDP reading, economic activity increased at an over one-year high in April, spearheaded by the construction sector. New hotel, residential housing and energy projects currently underway are turbocharging activity in the sector, as firms take advantage of cheaper financing conditions.
While national accounts figures for the first quarter are still outstanding in Guatemala, economic activity growth also edged higher in the first four months of the year compared to Q4. The picture is similar in Costa Rica: Economic activity growth in the January–April period tracked slightly higher than in October–December. Costa Rica’s fiscal situation is still worrying but has improved slightly in recent weeks, after the new government announced austerity measures to rein in the public wage bill. However, more fundamental reforms are still needed to put public finances on a sustainable long-term footing.
On the other hand, the Panamanian economy has lost steam in recent months on the back of a downturn in the construction sector, which was deepened by a month-long strike paralyzing building activity in the country. To reignite growth, the government recently announced a substantial spending boost for large-scale infrastructure projects. Honduras has also seen momentum ebb so far this year due to a weaker agricultural sector, partly caused by unusually warm weather.
Throughout the region, countries have seen a continuing surge in remittances so far this year, linked to a robust labor market in the U.S, where the unemployment rate is currently at the lowest level in 18 years. In May, Guatemala saw the highest inflow of remittances on record at over USD 800 million. This influx of capital is supporting domestic wages, private consumption and international reserves. In contrast, the regional external sector’s contribution to growth has likely weakened so far this year on a higher oil import bill.
On the political scene, ongoing unrest in Nicaragua is generating uncertainty and damaging the country’s relatively successful economic trajectory over recent years. Tourism and inward investment will almost certainly be hard by the upheaval—as the Central Bank’s governor recently warned—as will domestic sectors. Efforts are underway to reestablish a dialogue, which broke down in May, between the government and different sectors of civil society. Talks have yet to begin, however, and in the meantime violence continues.
Regional growth revised down on worsening dynamics in Puerto Rico
The Puerto Rican economy is expected to drag heavily on regional growth this year, as the economy continues to suffer the aftereffects of hurricanes Maria and Irma, and the ensuing destruction to physical infrastructure and power outages. Elsewhere in the region, the outlook is somewhat brighter. Economies 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. However, higher international oil prices will weigh on the region’s external sector. Key downside risks stem from the potential faster-than-expected monetary tightening by the U.S. Federal Reserve—which would weigh on regional credit growth, investment and private spending—and 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 2.1% this year, which is down 0.5 percentage points from last month’s estimate. This is largely driven by a greater expected contraction in regional heavyweight Puerto Rico, as the full impact of the devastation caused by last year’s hurricanes becomes clear. There was also a notable downgrade for Nicaragua due to continuing violent unrest. Belize, Haiti, Panama and Trinidad and Tobago also saw their projections downgraded this month. Conversely, the GDP forecast for the Dominican Republic was revised upwards following the recent string of positive economy data, as was Jamaica’s. The region’s remaining economies saw their projections unchanged. Regional GDP growth is seen accelerating to 3.7% in 2019.
Panama’s economy is expected to log the highest increase in the region despite a soft start to the year, the result of higher Panama Canal earnings and robust fixed investment levels. GDP in Panama is projected to increase 5.4%. Conversely, Puerto Rico is expected to be the region’s worst performer, recording a contraction of 8.0% in FY 2018.
GUATEMALA | Economic activity readings stay solid, but economic sentiment sours in May
High frequency data suggests that the economy accelerated slightly in the first quarter of the year, and available data for the second quarter indicates that the robust momentum is yet to fade; the monthly index of economy activity edged higher in April, while remittance inflows reached their highest level on record in USD terms in May. On the downside, according to a Central Bank survey, overall confidence in the economy decreased to its lowest level so far this year in May on the back of more pessimistic economic expectations for the next six months; this bodes poorly for investment going forward. In addition, the trade deficit widened in the first four months of the year on lower exports and higher raw material prices. Moreover, momentum late in the second quarter will likely be affected by the deadly volcanic eruption on 3 June, although the extent of the impact is still difficult to quantify.
Domestic demand should drive the economy this year. Private consumption will likely benefit from sound labor market developments and strong growth in remittances from the U.S., while government expenditure should increase on the back of infrastructure spending. Risks stem from potential political and economic uncertainty in the lead-up to next year’s presidential elections. The FocusEconomics Consensus Forecast panel expects the Guatemalan economy to expand 3.2% this year, unchanged from last month’s estimate, and 3.3% in 2019.
DOMINICAN REPUBLIC | Growth surges at the start of the second quarter
Economic activity growth surged to a near two-year high at the start of Q2 on an upturn in construction, particularly thanks to residential, tourism and energy projects. This came after strong growth in Q1 due to the impact of greater monetary stimulus. Moreover, tourist arrivals rose at a solid pace in the first four months of 2018, while in the year to May private sector credit growth boomed and international reserves ticked up on robust FDI and remittances. Thanks to the strong economic performance, fiscal receipts are above budgeted estimates so far this year, boosting the administration’s chances of meeting its 2.2% fiscal deficit target. On 1 May, the government announced it had established diplomatic relations with China, which will likely drive up inward investment in the medium term.
Growth will be robust this year, although it will likely dip from Q1’s elevated pace. The economy should be buoyed by continuing strong credit provision and fiscal stimulus in the U.S., which will support remittances, exports and tourism activity. However, the fiscal deficit, elevated debt servicing costs and a narrow tax base pose concerns, which could become more pressing with higher oil prices and as global financial conditions tighten. FocusEconomics panelists expect GDP growth of 5.0% in 2018, which is up 0.1 percentage points from last month’s forecast. For 2019, panelists see the economy expanding 4.4%.
PANAMA | Government announces stimulus measures to wake economy from recent slumber
In early June, the government announced its intention to amend existing fiscal expenditure laws that cap the fiscal deficit at 0.5% of GDP for 2018. The government plans to raise the fiscal deficit by one percentage point and inject USD 300 million into the construction of large-scale infrastructure projects to lessen the impact of the ongoing economic slowdown: Average monthly economic activity in Q1 dropped to a near three-year low; especially worrying was a contraction in construction activity in March. The construction sector is also expected to have a poor performance in the second quarter as a massive, month-long labor union that ended on 18 May brought the sector to a complete standstill. On the political scene, the U.S. government granted on 8 June the extradition of former president Ricardo Martinelli to face criminal prosecution in Panama. His return will unsettle the political landscape ahead of next year’s presidential election.
Higher oil prices, the recent labor dispute in the construction sector and the culmination of some large-scale infrastructure projects will constrain growth this year, although strong Panama Canal activity and the government’s looser fiscal stance will prop up the economy. The prospect 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 5.4% in 2018, which is down 0.1 percentage points from last month’s forecast. They expect GDP will expand 5.3% in 2019.
COSTA RICA | New government announces austerity measures, but more comprehensive fiscal reform bill is still needed
So far in 2018, the economy has performed modestly. Economic activity grew just under 3% in the first four months of the year—in large part due to greater activity in the services sector—and the large fiscal deficit has remained a pressing concern. President Carlos Alvarado, who was sworn in last month, has promised to bring down the fiscal deficit from last year’s record high of over 6%. On 30 May, the finance minister announced a plan to help control government spending, including measures to contain the public wage bill. Although the plan will have only a small impact on the fiscal deficit, it represents the administration’s willingness to make difficult political decisions. In addition, the measures should help ease the passage of a long-awaited bill through the Legislative Assembly which is aimed at increasing government revenue.
In 2018, increased political certainty following the election of Alvarado and strong demand from key export markets such as the United States should support economic growth. However, despite recent legislative efforts, persistent fiscal deficits and high public debt will continue to weigh on prospects. The analysts we surveyed this month expect GDP to grow 3.4% in 2018, unchanged from last month’s projection, and 3.5% in 2019.
INFLATION | Inflation stable in May
According to a preliminary estimate produced by FocusEconomics, regional inflation was 3.4% in May, unchanged from April’s figure. Higher inflationary pressures in the Dominican Republic, Guatemala and Nicaragua were offset by lower inflation in Costa Rica, El Salvador and Honduras. Most of the regional Central Banks that held meetings over the last month left rates unchanged in the face of generally mild price pressures, although the Bank of Jamaica cut rates in May in an effort to boost still-meager GDP growth and ensure inflation stays within its target range.
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