Central America Economic Forecast

Economic Snapshot for Central America

March 13, 2019

Regional growth likely perked up in Q4; early signs from 2019 are positive

FocusEconomics Consensus Forecast panelists expect the Central America and the Caribbean region to have expanded 4.1% in the fourth quarter of 2018, up from the third quarter’s 3.0% increase.

Puerto Rico seemed to drive the regional uptick in Q4, with the economic activity index soaring in annual terms in October-December. This was largely due to a favorable base of comparison, as hurricanes caused huge disruption to activity in the corresponding period of 2017, knocking out most of the country’s electricity supply. 

Fellow regional big hitter Panama recently reported Q4 national accounts figures. The economy gained momentum thanks to stronger showings in the construction, finance and mining sectors, although growth was still soft compared to the readings observed before 2018. The Dominican Republic continued its enviable growth trajectory, fueled by strong credit growth and remittances, while Guatemala appeared to chalk up a moderate expansion. Costa Rica likely lost speed in the final quarter, however, with strikes and uncertainty over fiscal reform weighing on activity.

Turning to the region’s smaller economies, firm national accounts figures are still outstanding. That said, Honduras and El Salvador appeared to gain steam according to monthly economic activity readings. The same can likely be said of Trinidad and Tobago, which should have benefited from higher natural gas prices and stronger LNG production. Moreover, Jamaica and Haiti likely continued to grow at a moderate pace, although Nicaragua was mired in a deep recession due to pervasive social instability.

Early signs bode well for the region’s performance in the first quarter of 2019: Economic activity growth in Guatemala rose in January; tourist arrivals expanded robustly in both the Dominican Republic and Jamaica in January; while remittances are plump in Guatemala and the Dominican Republic so far in the quarter. Moreover, Costa Rica should be benefiting from improved investor confidence and an end to strikes following the approval of the fiscal reform late last year, while the opening of a copper mine in Panama in February will support the extractive sector.

On the political front, the Dominican Republic’s government pulled the signing of a national electricity pact in mid-February and has yet to announce another date. The pact aims to modernize the electricity sector, reduce blackouts and lower costs. The decision was criticized by businesses, and means that the electricity sector will continue to present an impediment to growth and a drag on the fiscal position.

The U.S. government recently announced the extension of temporary protected status (TPS) for citizens of Nicaragua, Haiti and El Salvador through 2 January 2020. This followed a court injunction in October last year, which blocked the government’s efforts to terminate these countries’ TPS, and should support remittance flows.

Regional economy should make further progress in 2019, but downside risks linger

In 2019, Central America and the Caribbean should continue to benefit from robust—albeit moderating—momentum in the U.S., the region’s key trading partner, which should underpin remittance inflows, tourism activity and exports. The recovery of the Puerto Rican economy should continue as rebuilding efforts accelerate. Moreover, Panama is set to regain its robust growth trajectory following a blip in 2018, thanks to a new mining project and infrastructure development, while the intensity of the recession in Nicaragua should lessen.

Uncertainty over immigration policy in the United States—particularly the temporary protected status of many Central Americans currently residing there—global trade tensions and volatile oil prices are the key external risks. Internally, key risks include a further deterioration of the political situation in Nicaragua, potential political uncertainty in Guatemala in the run-up to elections this year and vulnerability to extreme weather events.

FocusEconomics panelists expect regional growth of 3.6% this year, which is unchanged from last month’s forecast. Honduras, Nicaragua and Jamaica had their 2019 growth forecasts downgraded this month, while the Dominican Republic had its forecast upgraded. The region’s remaining economies saw their 2019 projections unchanged. Our panelists see regional growth at 3.3% in 2020.

The Dominican Republic and Panama are expected to log the region’s fastest growth this year, with both economies forecast to expand by 5.0% or more. Conversely, Nicaragua is expected to be the region’s laggard with a 2.0% contraction, as the fragile political situation continues to weigh on the economy.

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GUATEMALA | Available data from Q1 2019 is encouraging

Available data for Q1 is fairly positive. The private sector seemingly got off to a good start in January with growth in the economic activity index picking up pace and private sector credit growing at the second-quickest pace in two-and-a-half years. However, remittances growth has cooled, with average growth in January–February trending markedly below the reading observed in the fourth quarter of last year. In addition, the merchandise trade deficit widened in January on a drop in exports and robust imports. This follows a fourth quarter in which the economy is expected to have performed well on the back of the domestic side of the economy. Remittances growth was strong in the quarter and the economic activity index edged up. However, the trade deficit widened in the quarter. Moreover, the economy accelerated over last year as a whole according to a preliminary estimate.

Domestic demand is expected to continue driving economic growth, powered by a pick-up in fixed investment and public expenditure ahead of the June presidential election. However, uncertainty over U.S. immigration laws remains a key downside risk to remittances, while rising domestic political risk prior to the election could dent consumer and investor confidence.

DOMINICAN REPUBLIC | Strong momentum continues; government postpones signing of electricity pact

The economy remains strong, even though year-on-year growth is likely slowing due to a high base effect. Subdued inflationary pressures and a robust private-sector credit expansion through February bode well for household spending. Moreover, tourist arrivals grew healthily in January, particularly from the U.S, while the monthly manufacturing activity index reached an all-time high in the same month according to the Association of Industries of the Dominican Republic (AIRD). This follows a rip-roaring performance in 2018, which likely saw the economy register by far the fastest growth in the CENAM region. On the political front, the signing of the Electricity Pact was postponed once again in mid-February, and a new signing date has yet to be set. Consequently, the electricity sector will remain a drag on growth and the fiscal position.

Economic growth will likely ebb this year due to tough prior-year comparatives. However, healthy fixed investment and private consumption should support the economy, which will continue to expand notably faster than the regional average. Downside risks stem from volatile oil prices and the possibility of a faster-than-expected economic slowdown in the U.S.

PANAMA | Growth picks up in Q4 2018; Cobre Panama mine comes online

The economy continued to recover in the fourth quarter, gaining steam thanks largely to a ramp-up of activity in the construction sector, but nevertheless bringing to a close an overall subdued annual performance in 2018. Indeed, although the mining and financial services sectors also performed quite well and construction activity benefited from the government’s public infrastructure push in the quarter, a slowdown in trade and shipping—the country’s core growth engine—weighed heavily on the Q4 print. Looking at Q1, although no hard data is available yet, the narrative is likely to be similar: Infrastructure spending is set to pick up, while construction should power the economy again. Growth in mining should also accelerate following the start of operations at the Cobre Panama mine in mid-February. However, signs of a slowdown in China, Europe and the U.S. could bode ill for the trade sector.

Growth is set to regain momentum this year on the back of rapidly rising output at the Cobre Panama mine and strong infrastructure spending, as set out in the 2019 budget. An intensifying global growth slowdown and trade protectionism, however, remain the main downside risks to the country’s crucial shipping and trade sectors.

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COSTA RICA | Economy performed poorly in 2018; IMF urges further fiscal measures

The economy slowed in 2018 due to weak consumption growth and sluggish fixed investment, according to preliminary data released by the Central Bank. Although GDP data for the fourth quarter will only be released on 29 March, the Central Bank’s monthly economic activity data points to a sharp slowdown in the final months of the year. This is likely due to public street protests against new fiscal reform measures including the replacement of the old general sales tax with a VAT. On 25 February, the IMF said the fiscal reform was critical to restoring sustainability of government finances; however, the Fund also stated that additional consolidation steps should be pursued to reduce the government’s high near-term financing needs. Meanwhile, a vast new industrial port was inaugurated in Limón on 28 February, which will significantly enhance the maritime connectivity of Costa Rica.

Stronger fixed investment growth on the back of a more certain and sustainable fiscal outlook, coupled with solid export growth linked to a weaker colón and robust U.S. demand, should lead to an uptick in economic growth this year. That being said, fiscal austerity and tighter monetary conditions, compounded by ongoing instability in neighboring Nicaragua, could limit growth prospects.

INFLATION | Inflation falls in January, preliminary data suggests slight uptick in February

According to an estimate produced by FocusEconomics, regional inflation was 2.0% in January, down from December’s 2.3%. Price pressures eased in most countries on lower energy prices. A preliminary estimate, taking into account data for around half the region’s economies, suggests inflation ticked up to 2.1% in February. On the monetary policy front, the Bank of Jamaica continued its easing cycle at its meeting on 20 February, in order to support inflation which is currently substantially below target. Other central banks which held meetings over the last month left rates unchanged.

Currency weakening and solid domestic demand will drive inflation in the Central America and Caribbean region this year. The future evolution of oil prices, which were highly volatile last year, is a key source of uncertainty to the region’s inflation outlook given its reliance on imported oil. FocusEconomics panelists see inflation coming in at 3.1% in 2019, unchanged from last month’s forecast. For 2020, FocusEconomics panelists expect inflation to remain stable at 3.1%.

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Oliver Reynolds

Economist

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