Central America Economic Outlook October 2018

Central America: Economic Snapshot for Central America - October

October 7, 2018

Regional economy gains steam in the second quarter

A comprehensive set of data shows that the economy of Central America and the Caribbean strengthened in the second quarter of the year, with growth rising to 2.2% from 2.0% in Q1. Excluding Puerto Rico—which is still mired in a recession intensified by the damage caused by last year’s hurricanes—regional GDP growth reached 3.7% in the second quarter, up from 3.5% in Q1.

After the Dominican Republic reported a stellar Q2 GDP outturn in August, over the last month almost all the region’s remaining economies have released quarterly GDP figures. As FocusEconomics panelists had predicted, activity in Costa Rica and Guatemala recovered following a limp first quarter. Both economies benefited from strengthening fixed investment, while private consumption in Guatemala was boosted by surging remittance inflows. However, both saw also their external sectors weaken, with exports struggling to gain traction and imports rising at a strong pace—likely on higher oil prices.


Most of CENAM’s smaller economies also saw a pick-up in growth. Honduras’s improved performance was driven by robust domestic demand. Meanwhile, the expansion in Jamaica was spurred by greater agricultural and mining output, and Belize was boosted by a stronger primary sector. In contrast, Panama’s economy stumbled in Q2, with the construction sector weighing heavily on activity due to prolonged strike action.

Looking to Q3, economic activity readings for regional heavyweights the Dominican Republic, Costa Rica and Guatemala suggest solid momentum has continued, while double-digit remittances growth in Guatemala throughout the quarter likely buoyed private consumption. Moreover, green shoots of recovery are appearing in Puerto Rico as the electricity grid comes back on line; the contraction in the economic activity index moderated for the eighth straight month in July.

In contrast, Panama’s economy remained lethargic in July, while Nicaragua suffered another sharp contraction in the same month due to the economic disruption caused by mounting social unrest.

On the political scene, the Dominican Republic presented its draft 2019 budget at the end of September. The budget aims to reduce the fiscal deficit, while protecting social spending and boosting capital investment. Reducing the fiscal shortfall is also a key issue in Costa Rica, where the government’s flagship tax reform bill is slowly working its way through parliament. The administration recently announced plans to simplify bureaucracy for businesses, as part of efforts to garner opposition support. Meanwhile, popular discontent at the bill is becoming more evident, with a general strike currently ongoing.

Finally, in early October, a U.S. judge suspended the U.S. government’s decision to end Temporary Protected Status for citizens of Haiti, El Salvador and Nicaragua in 2019. If the decision is definitively overturned, this would safeguard remittance inflows to these countries.

Growth should be robust going forward, but downside risks persist

Over the next few quarters, Central America and the Caribbean should continue to benefit from solid domestic demand and the booming U.S. economy, which should fuel remittance inflows, tourism and exports. Moreover, Puerto Rico will likely return to growth in Fiscal Year 2019, which ends in June 2019, as rebuilding efforts gain traction and thanks to a very favorable base of comparison. Uncertainty over immigration policy in the United States, global trade tensions and faster-than-expected tightening by the Fed are the key external risks. Internally, a deterioration of the political situation in Nicaragua, a failure to enact tax reform in Costa Rica, and potential political uncertainty in Guatemala leading up to elections next year are the key risks.

FocusEconomics panelists expect regional growth of 2.0% this year. Next year, regional growth is seen accelerating to 3.8%, unchanged from last month’s forecast. A significant upgrade to the Dominican Republic’s growth forecast for 2019 offset downward revisions to growth in Costa Rica, El Salvador, Guatemala, Nicaragua, Jamaica and Trinidad and Tobago. Forecasts for the region’s remaining economies were unchanged.

The Dominican Republic and Panama are expected to log the region’s fastest growth next year, with both economies expanding at or above 5.0%. Conversely, Trinidad and Tobago is expected to be the region’s laggard with 1.8% growth, as a weak non-hydrocarbon sector weighs on the economy.

GUATEMALA | Growth accelerates in Q2, powered by private consumption

The Guatemalan economy regained steam in the second quarter on the back of strong domestic demand. The pace of growth in private consumption nearly doubled, with households benefitting from robust remittances growth. Moderating inflationary pressures provided further stimulus to private consumption. On the other hand, the external sector weakened, with exports contracting sharply and imports rebounding. Looking at the third quarter, the domestic economy likely continued to drive economic momentum. Remittances growth remained strong throughout the quarter, and remittances reached the highest USD value ever recorded in August, boding well for private consumption. Moreover, economic activity shifted into a higher gear in August. However, severe drought conditions in the north of the country could have dampened agricultural output.

Economic growth is expected to tick up next year on the back of strong domestic demand. A tight labor market should drive wage growth while strong remittances inflows are likely to provide a further boost to household spending. Meanwhile, government infrastructure spending should be solid. Potential political and economic uncertainty leading up to next year’s presidential elections pose downside risks, however. FocusEconomics Consensus Forecast panelists expect the Guatemalan economy to expand 3.1% this year and 3.2% in 2019, down 0.1 percentage points from last month’s estimate.

DOMINICAN REPUBLIC | Economy continues to expand at a canter heading into H2

The economy continues to perform well so far in H2. Economic growth was rapid in July, supported by retail, mining and quarrying, and manufacturing in duty-free zones. Moreover, tourist arrivals were up year-on-year in July and August—likely supported by the strong U.S. labor market—while private credit growth remained in double-digits in September, despite moderating due to recent monetary tightening. Robust economic growth has boosted tax revenues, which grew markedly in the year to July. Coupled with constrained public spending, this has helped the government strengthen its fiscal position so far this year. This comes after a stellar economic expansion in H1, underpinned by a surge in fixed investment and buoyant private consumption. On 28 September, the government presented its 2019 budget to Congress, which aims to shrink the budget deficit through improved tax collection, while simultaneously increasing social spending.

Growth will likely moderate slightly going forwards after several quarters of above-potential readings but should still compare favorably to regional peers. Strong fixed investment and spillovers from the expansion in the U.S. economy, which should continue to fuel remittances, exports and tourism activity, are expected to drive the economy. Downside risks stem from higher oil prices, tighter international financial conditions and elevated debt servicing costs. FocusEconomics panelists expect GDP growth of 5.5% in 2018. For 2019, panelists see the economy expanding 5.0%, which is up 0.3 percentage points from last month’s forecast.

PANAMA | Feeble economic performance continues in July

Economic growth plunged to an eight-and-a-half year low in the second quarter, hampered by the month-long wage strike in the construction sector in April–May, which halted nearly all ongoing projects. Available data regarding the third quarter is so far mixed, but a likely rebound in construction should have helped growth improve somewhat. Moreover, freight data in the Panama Canal picked up significantly in August, which bodes well for activity in the export-oriented sectors—and notably the Colón Free Trade Zone.On the other hand, the monthly economic activity indicator (IMAE, Índice Mensual de Actividad Económica) was very weak in July.

After a likely softening this year, growth should pick up pace in 2019. It will notably be supported by the opening of the large Cobre Panama copper mine, as well as new infrastructure projects boosting the construction sector. Furthermore, the narrowing of the fiscal and current account deficits should make the country more resilient to shocks. Nevertheless, the external sector remains extremely vulnerable to the effects of the US-China trade war, which will likely affect trade flows in and around the all-important Panama Canal. FocusEconomics Consensus Forecast panelists project that the economy will grow 4.6% in 2018 and 5.2% in 2019, which is unchanged from last month’s forecast.

COSTA RICA | Economy rebounds in Q2, crucial fiscal reform bill yet to clear parliamentary hurdle

The economy found its feet in the second quarter of 2018, as year-on-year GDP growth accelerated to the fastest pace in a year. The upturn was driven by increased fixed investment, which was partly due to a low base effect. Government consumption increased at a steady pace, while private consumption expanded at a slightly slower rate on the back of higher unemployment. The external sector detracted from overall growth. This broadly positive momentum carried over into the start of Q3, as economic activity in July grew at the fastest pace since January 2017. However, the economy will have been hampered by union strikes towards the end of the quarter as, since early September, workers have rallied against a fiscal reform bill currently making its way through the Legislative Assembly. The bill will introduce a VAT system, raise income taxes on higher-income earners and constrain government spending from next year, all to the benefit of the public purse but fiercely opposed by those protesting on the streets.

A more stable political environment coupled with strong growth in the United States—boosting demand for exports—should support economic growth this year and next. However, austerity measures to help reduce the fiscal deficit will weigh on prospects, as could instability in neighboring Nicaragua. FocusEconomics Consensus Forecast panelists expect GDP to grow 3.1% in 2018 and 3.2% in 2019, which is down 0.1 percentage points from last month’s projection.

INFLATION | Inflation ticks up in August

According to a comprehensive estimate produced by FocusEconomics, regional inflation hit 3.6% in August, marginally up from July’s 3.5%, largely due to higher price pressures in Costa Rica and Guatemala. In contrast, inflation in Panama and the Dominican Republic eased compared to the previous month. A preliminary estimate for September puts regional inflation at 3.7%, with figures for several countries in the region still outstanding. The monetary policy front has been quiet in recent weeks, with the central banks that held meetings opting to stay put.

As a net energy importer, inflation in the Central America and Caribbean region will be driven higher this year and next by rising international oil prices. FocusEconomics sees inflation coming in at 3.2% in 2018. For 2019, FocusEconomics panelists expects inflation to rise to 3.3%, unchanged from last month’s forecast.

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Written by: David Ampudia, Senior Economist

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