Central America Economic Outlook April 2018

Central America: Economic Snapshot for Central America & the Caribbean

April 18, 2018

Economic data corroborates region’s improving performance


A comprehensive GDP dataset shows the economy of Central America and the Caribbean regained some lost ground in the fourth quarter of last year on the back of healthier growth in the Dominican Republic, Costa Rica and Guatemala. Annual GDP growth for the region came in at 2.7% in Q4, marginally below the 2.8% expansion previously estimated, but a stronger performance than the 2.2% increase logged in Q3. The regional economy is expected to have strengthened further in the first quarter of this year, buttressed by stronger growth in all the region’s heavy-hitters, but weighed down by the beleaguered Puerto Rican economy.


Despite heightened political noise and mounting concerns over fiscal sustainability, the Costa Rican economy picked up some slack in the fourth quarter, with annual GDP growth speeding up from a meager third-quarter performance on the back of resilient household spending. That said, investors continued to scale down their capital outlays in the run-up to the general elections, while government consumption moderated on efforts to rein in public current spending. Likewise, GDP data for the quarter in Guatemala indicated growth was the strongest in three quarters, underpinning an economic turnaround that followed a string of political scandals last year.


Elsewhere in Central America, growth in El Salvador moderated in the last leg of the year on the back of falling exports and despite resilient private spending. GDP growth also eased slightly in Panama, while the Honduran economy took a breather in Q4 on the back of uncertainty surrounding the contested November elections. Conversely, the Belizean economy staged a surprising recovery, expanding at a two-year high in Q4 on the back of a solid performance in the services sector. The Nicaraguan economy also ended the year in good shape, with growth benefiting from a rosy external landscape.


Looking at the economies of the Caribbean, recently released GNP data for Puerto Rico confirmed the economy shrank for a fifth consecutive period in the fiscal year ending in June 2017. Furthermore, economic activity data for the July-to-December period shows activity plunged in annual terms, showcasing the effects of Hurricanes Irma and Maria and a dire fiscal panorama. On a more positive note, the economy of the Dominican Republic regained traction in Q4 after two quarters in the doldrums. Growth in Jamaica also accelerated to a one-year high in Q4, with the economy benefiting from strong mining activity and solid tourist arrival numbers.


In the political arena, left-of-center candidate Carlos Alvarado of the incumbent Citizen’s Action Party won the second round of Costa Rica’s presidential elections, held on 1 April. Although Alvarado has promised to implement the necessary reforms to reduce Costa Rica’s daunting fiscal deficit, his position in congress is weak, with his party holding only 10 seats in the 57-seat chamber. A fragmented congress threatens to limit the scope and extent of Alvarado’s policies, particularly as his own party has a track record of only very modest success in implementing fiscal measures.


Meanwhile, the regional economy of Central America and the Caribbean is expected to have expanded at a marginally faster pace in the first quarter. Although the winds of protectionism are blowing with increased force in the U.S., robust global trade flows persisted in the quarter, buttressing the region’s external sectors. A tight labor market in the U.S. also boosted remittances in many of the region’s economies, while tourism sectors in most countries fared exceedingly well in Q1. All told, the regional economy is expected to have increased 2.8% in Q1, the highest reading in a year.


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Myriad threats to growth continue to obscure the region’s economic outlook


The regional economy should gradually emerge from last year’s trough, supported by remittance inflows, resilient external demand and rising FDI. Nonetheless, growing global protectionism is increasingly posing a major threat to the region’s recovery. Likewise, tougher U.S. immigration policy and ongoing fiscal concerns in some economies are pulling on growth estimates. Additionally, a gradual tightening in global monetary conditions—stemming in particular from the U.S. Federal Reserve’s steady pace of rate normalization—should tighten financing conditions in Central America and the Caribbean, denting business activity and weighing on private spending.


FocusEconomics panelists expect regional GDP growth of 2.6% this year, which is down 0.1 percentage points from last month’s estimate. The dimmer outlook reflects a downgrade to the economic prospects for Puerto Rico, which continues to suffer from the aftermath of Hurricanes Irma and Maria and a deeply indebted government. GDP growth projections for the economies of Haiti, Jamaica and Trinidad and Tobago were also revised downwards this month. Conversely, improving economic prospects for the Dominican Republic warranted an upgrade, while growth estimates for the El Salvadoran economy were also revised upwards. Regional GDP growth is seen accelerating to 3.7% in 2019.


The economy of Panama is expected to log the highest increase in the region for a second consecutive year in 2018, the result of higher Panama Canal earnings and robust fixed investment levels. GDP in Panama is projected to increase 5.5%. Conversely, Puerto Rico is expected to be the region’s laggard, recording a contraction of 4.2% in FY 2018.


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GUATEMALA | Economic growth trends higher early this year


Economic growth ticked up in the closing months of 2017 on stronger household spending, a subdued recovery from last year’s political scandals that lifted full-year growth to 2.8%. In Q4, spending across the domestic economy rose as consumers benefited from strong remittance inflows and the government from long-overdue maintenance outlays. That said, living standards continued to stagnate as households felt the pinch of battered confidence following years of political wrangling and stifling rates of crime and corruption, as well as insufficient public investment. On the external side, record-high remittance inflows and low oil prices last year helped further improve the current account. Available data suggests the economy was off to a steady start in the first quarter, with economic activity edging higher through February on the strength of the manufacturing and services sectors.


Despite a slowdown in year-on-year remittance inflows since the end of last year, the booming U.S. economy is expected to support household spending and brighter growth prospects in 2018. Government spending is also expected to rise on heavier infrastructure outlays. Meanwhile, investor confidence will take time to recover following last year’s scandals surrounding President Jimmy Morales, and debilitating levels of corruption and the threat of a U.S. immigration crackdown will continue weighing heavily on the outlook. FocusEconomics panelists expect growth of 3.3% this year, which is unchanged from last month’s forecast, and 3.4% next year.


DOMINICAN REPUBLIC | Public stimulus supports economic recovery


Leading data indicates that the economy has maintained the solid momentum from the fourth quarter of 2017 this year as it continues to benefit from the fiscal and monetary easing that has been in place since mid-2017. Despite moderating slightly from January, economic activity expanded robustly in annual terms in February while tourist arrivals continued to grow healthily year-on-year in the same month, heightening expectations of upbeat economic growth results for the first quarter of the year. In addition, the country’s public finances remain in relatively good shape. Government revenues averaged double-digit growth in the January-to-March period, exceeding budgeted estimates and putting the government on track to meet its fiscal deficit target of 2.2% of GDP for 2018.


The economy is poised to maintain robust growth this year, aided by a stronger U.S. economy that should stimulate higher remittances and increased tourism activity. Moreover, since investments are largely deployed in the tourism sector, increased tourist arrivals should spur FDI. An unexpected deterioration in external demand and costlier imports due to rising oil prices could pose downside risks to the outlook, however. FocusEconomics panelists expect GDP growth of 4.6% in 2018, which is up 0.1 percentage points from last month’s forecast. For 2019, panelists see the economy expanding 4.4%.


PANAMA | Economy continues to grow briskly in early 2018


The economy continues to be on a robust path after logging in 2017 the fastest growth rate in the Central American and Caribbean region. In January, Panama Canal earnings increased 6.3% in year-on-year terms, and economic activity jumped to a five-month high, driven by buoyant growth in the country's trade-related sectors. The expansion of a key port terminal on the Pacific Coast became operational on 2 April, which will improve Panama's port infrastructure and help accommodate increased demand from the expanded Panama Canal. On 9 April, the government presented to the National Assembly a draft bill to revamp the country’s financial sector. Some of the provisions stipulated in the law include the creation of a legal framework to regulate new financial services and adhere to international standards of transparency to improve competitiveness and efficiency.


Economic growth is expected to maintain a broadly steady pace in the next two years on the back of healthy growth in fixed investment and public consumption. Nevertheless, disruption of global trade due to growing protectionism poses a downside risk to growth. FocusEconomics Consensus Forecast panelists project that the economy will grow 5.5% in 2018, which is unchanged from last month’s forecast. They expect GDP will expand 5.4% in 2019.


COSTA RICA | Carlos Alvarado wins second round of presidential elections


Amid political uncertainty and rising interest rates, the economy still grew at a faster year-on-year pace in Q4 last year compared to Q3 on stronger private consumption growth. However, weighing on the expansion was weaker government consumption growth and a contraction in fixed investment for the second consecutive quarter. Moreover, strong demand for imports and a weak export performance led the external sector to detract from Q4’s overall expansion. Looking ahead, relatively healthy year-on-year growth in economic activity in both January and February bodes well for the GDP result in Q1. More recently, on the political front, Carlos Alvarado of the incumbent Citizens’ Action Party won the final round of voting in the presidential elections on 1 April, beating runner-up Fabricio Alvarado of the National Restoration Party. The president-elect, who will take over from President Luis Guillermo Solís on 8 May, aims to shore up economic growth and reduce the fiscal deficit from 6.2% of GDP last year to 3.0% in 2022.


This year, more political certainty and strong demand from key export markets such as the United States should support economic growth. However, persistent fiscal deficits and high public debt will continue to weigh on prospects. The analysts FocusEconomics surveyed this month expect GDP to grow 3.5% in 2018, which is unchanged from last month’s projection, and 3.6% in 2019.


INFLATION | Inflation gains some steam in March


According to an estimate produced by FocusEconomics, inflation ticked up to 3.7% in March from 3.6% in February, which had marked the joint-lowest print in just over a year. Supported by higher food and oil prices, inflation accelerated across most economies in the region, including Costa Rica, the Dominican Republic and Panama. This more than offset softer price pressures in El Salvador and Guatemala.


Higher non-core prices should support inflation this year. Our panel sees inflation coming in at 3.4% in 2018, which is unchanged from last month’s estimate. In 2019, Consensus Forecast panelists expect inflation to remain broadly stable at 3.5%.


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Written by: David Ampudia, Senior Economist


 

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