Economic Snapshot for Central America

June 12, 2019

Central America & Caribbean regional economy to shift into a higher gear in 2019

Regional economic activity is seen shifting into a higher gear this year, mainly owing to a recovery in Puerto Rico. Remittances and tourism inflows should remain robust on a sound U.S. labor market, which should boost household incomes in turn. U.S. immigration policy uncertainty, exposure to extreme weather events and the crisis in Nicaragua pose key downside risks, however.

Central America and the Caribbean is projected to grow 3.4% in 2019, unchanged from last month's projection. For 2020, Central America is expected to grow 3.2%, down 0.1 percentage points from last month's forecast.

Guatemala Economic Outlook

In April, growth in economic activity accelerated, on the back of a broad-based improvement in activity across domestic sectors, while annual remittances growth was strong, boding well for household income. In the same month, however, inflation jumped and exports fell, while import growth remained robust. This follows a generally weak first quarter in which the economic activity index averaged at the lowest level in a year. This came on the back of a noticeable pick-up in inflation in the period and markedly softer growth in remittances. Meanwhile, a new Congress and president will be elected on 16 June. This will mark the end to President Jimmy Morales’ corruption-scandal laden presidency as he is barred from running, although the elections have still been overshadowed by corruption allegations nonetheless. A run-off between Sandra Torres and Alejandro Giammattei on 11 August is expected.

Upbeat government consumption should ensure domestic demand remains strong, as growth is projected to be stable this year despite a drag on remittances owing to waning momentum in the U.S. economy. Moreover, rising political uncertainty could dent consumer and investor confidence.

FocusEconomics Consensus Forecast panelists expect the Guatemalan economy to expand 3.1% in 2019, which is up 0.1 percentage points from last month’s forecast, and 3.2% in 2020.

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Dominican Republic Economic Outlook

The economy expanded at a slower annual pace in the first quarter of this year than it did in the fourth quarter of last year, although growth was still among the fastest in the CENAM region. The construction sector continued to drive growth in Q1, as did the services, and mining and quarrying sectors. Likely underpinning all of this was a double-digit increase in private sector lending, strong employment growth, a surge in foreign direct investment and healthy tourist arrivals in Q1. Turning to Q2, private sector lending continued to grow rapidly through to May despite softening somewhat, hinting the economy will expand at another robust pace in the quarter; however, an expected slowdown in the U.S. could hurt remittances.

Growth should ease this year on a high base effect and an ebbing U.S. economy. Nevertheless, the expansion should still be notably above the regional average, underpinned by strong private-sector credit growth, a booming tourism sector and a healthy labor market. A fragile fiscal position and a faster-than-expected slowdown in the United States are the main downside risks.

FocusEconomics panelists expect GDP growth of 5.3% in 2019, which is unchanged from last month’s forecast. For 2020, panelists see the economy expanding 4.7%.

Panama Economic Outlook

Growth is expected to have remained broadly steady in the first quarter as reflected by the monthly economic activity indicator, supported by the trade and finance sectors. However, traffic in both the Panama Canal and national ports declined in March after registering modest growth in January and February. Moreover, import and re-export activity sharply contracted in the Colón Free Trade Zone throughout the quarter, while April port and Canal data shows shipping activity remained feeble at the start of Q2. On the political front, President-elect Laurentino Cortizo declared on 4 June he would review the terms of the contract of the Cobre Panama project, operated by Canadian miner First Quantum Minerals. This has sown further uncertainty over the mining project, which employs more than 9,000 Panamanians, less than a week after Parliament rejected a bill seeking to ensure the mine’s legal security.

Although the escalation of U.S.-China trade tensions in recent weeks cast a cloud over prospects in the all-important trade sector, growth is projected to accelerate this year on higher private spending and strong public infrastructure investment. Lower global growth and a further deterioration of U.S-China relations remain key downside risks.

FocusEconomics Consensus Forecast panelists project that the economy will grow 4.9% in 2019, which is up 0.1 percentage points from last month’s forecast, and 4.8% in 2020.

Costa Rica Economic Outlook

The economy appears set for a modest second quarter. Consumer confidence fell further into pessimistic territory in May, suggesting private spending will prove lackluster in the quarter. Moreover, merchandise exports barely eked out growth in April while imports plummeted, indicating gloomy domestic demand. On a brighter note, electricity generation, most of which comes from hydropower, hit a record high in May despite the prolonged dry spell caused by the El Niño effect that has hampered the agricultural sector this year. This all comes after limp annual economic activity growth in Q1—barely changed from Q4—due to a struggling agricultural sector. Nevertheless, the unemployment rate ticked down in Q1 from the previous quarter, while the government’s fiscal deficit was stable compared to the same quarter a year earlier.

This year, economic growth should pick up slightly on stronger fixed investment, partly thanks to a clearer investment picture following last year’s fiscal reforms. However, instability in Nicaragua and growing global trade tensions weigh on the outlook.

FocusEconomics Consensus Forecast panelists expect GDP to grow 2.8% in 2019, which is unchanged from last month’s forecast, and 2.8% again in 2020.

Central America Monetary & Financial Sector News

Regional inflation accelerated from 2.0% in March to 2.2% in April as an uptick in global oil prices intensified price pressures in most countries. Looking forward, inflation is expected to rise from current levels due to solid domestic growth. Developments in the oil market, however, will likely shape future trends in regional inflation.

Fears of weaker growth has been a hot topic among central banks in the region in recent weeks, which led the central banks of the Dominican Republic, Costa Rica and Jamaica to ease monetary policy conditions; Guatemala’s, however, stood pat. The regional average interest rate is seen remaining fairly stable due to moderate inflation and a more dovish U.S. Federal Reserve.

Currencies in the region are expected to lose ground against the greenback this year compared to 2018. Large current account deficits, lingering global trade tensions and an attractive U.S. dollar are seen exerting downward pressure on the respective currencies. Political instability in some countries could further drive the decline.

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