Economic Snapshot for Central America

October 10, 2017

Growth tumbles to an over six-year low in Q2

Economic growth in the Central American and Caribbean region slowed in the second quarter, according to more comprehensive data. The region’s economy expanded 2.3% in annual terms in Q2, a notable deceleration from the 3.0% increase recorded in Q1 and the weakest rate of expansion since Q4 2010. The lackluster performance reflected worsening dynamics in a majority of economies and deteriorating domestic conditions across the region on slower credit growth and increased fiscal consolidation measures. In particular, the Dominican Republic and Guatemala had the weakest GDP growth in several years.

The Guatemalan economy recorded its feeblest quarter of growth in nearly seven years in Q2 as the external sector dragged on growth and fixed investment growth decelerated markedly. This comes at a time when political noise in the country has intensified. Although President Jimmy Morales remained immune from prosecution over suspected irregularities in financing in a congressional vote on 11 September, political unrest remains high and support for his legislature has dwindled. In the Dominican Republic, a second release confirmed GDP in Q2 was the weakest in over four years as the government’s fiscal consolidation drive weighed heavily on capital expenditure. Dominican authorities have quickly reacted to the mediocre economic performance, as both the government and the Central Bank have already enacted more accommodative policies to shore up growth.

Elsewhere in the region, economic momentum held up somewhat better in the second quarter. The Panamanian economy logged the fastest expansion in the region despite decelerating slightly as the upturn in global trade continued to fuel healthy Canal revenues and strong growth in export-oriented services. The agricultural sector also expanded for the first time in a year and a half. In Nicaragua, economic activity lost some steam but continued to grow at a solid clip led by soaring coffee and sugar exports. Bumper crops also buttressed the El Salvadorian economy, which expanded at a steady pace in the quarter. The upbeat momentum seen in many countries’ agricultural sectors likely carried over into Q3, but is expected to have been jolted in early Q4 due to the devastation caused by Hurricane Nate, which barreled up the eastern coast of Central America in early October.

The region’s economic performance is expected to have firmed up in the third quarter as growth in Guatemala and the Dominican Republic bounces back to previous levels and a tight labor market and resilient domestic demand in the U.S. continue to buttress healthy remittances and investment inflows. However, feeble fiscal metrics across a number of countries still pose a severe risk to growth. The Costa Rican government remains unable to reach political consensus, pushing back a crucial comprehensive fiscal reform which now seems unlikely to be resolved before the elections scheduled for next year. Meanwhile, El Salvador was placed in selective default by S&P Global Ratings on 2 October as authorities scrambled to amend the terms of impending financial obligations. The country then had its rating upgraded to CCC+ the following day as the government successfully garnered enough support to reform the pension system, which alleviates the country’s short-term liquidity concerns but does little to tackle underlying structural issues.  

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Economic growth to settle at slower cruising speed

The Central American and Caribbean regional economy is set to grow at a moderate pace in the foreseeable future as fiscal distress across several economies and lingering political noise continue to offset healthy real income growth and a pick-up in global trade. The FocusEconomics panel expects growth to come in at 2.8% this year which would, if materialized, represent the weakest rate of expansion since 2010. Economic growth is expected to accelerate marginally next year to 3.0%, which is unchanged from last month’s estimate.

The projection for 2018 GDP growth was revised down in Guatemala as the ongoing political scandal surrounding President Jimmy Morales continues to weigh on investors. In addition, Puerto Rico saw its growth forecast downgraded as the island struggles to recover from the devastation of Hurricanes Irma and Maria. Conversely, the Costa Rican economy is seen growing at a faster clip in 2018 than estimated last month. The remaining countries in the region saw no change in their forecasts.

The economies of Panama and the Dominican Republic are set to be the best performers next year, growing 5.6% and 4.6%, respectively. In contrast, Puerto Rico’s economy is expected to contract again in FY 2018, which ends in June 2018.

GUATEMALA | Second-quarter growth slows markedly on subdued exports and investment growth

In Q2, the economy posted its weakest quarter of growth in nearly seven years, dragged down by a contraction in exports and slower fixed investment growth. Moreover, household spending decelerated further in the quarter, edging down despite impressive remittances growth in most of Q2. There were, however, some upbeat elements of the GDP report. Government spending increased marginally after contracting in Q1, likely the result of pledged public capital expenditures. That said, it appears that economic growth in Q3 could perform similarly: Economic activity grew at a broadly unchanged pace in July and August; and remittances were robust in Q3. Political uncertainty is likely to also weigh on the outlook for H2. Despite narrowly maintaining his immunity from prosecution in a congressional vote last month, calls for President Jimmy Morales’ ouster have only grown in the weeks since.

Despite a weak H1, growth is expected to pick up in H2 before easing again next year. Household and government spending are projected to support growth in the medium term, with the former expected to continue benefitting from a robust inflow of remittances from the United States. Political tensions will, however, continue to weigh negatively on the outlook. Our panelists forecast that GDP will grow 3.3% this year and 3.4% next year, which is down 0.1 percentage points from last month's forecast.

DOMINICAN REPUBLIC | GDP growth to bounce back in H2 on ample public support

In Q2, the economy expanded at the slowest pace in over four years as fixed investment growth tumbled following the government’s fiscal consolidation drive and weak activity in the construction sector. Although Hurricanes Irma and Maria inflicted serious damage to populated areas and touristic destinations in September, GDP growth is nevertheless expected to bounce back in H2 as both the Central Bank and the government have enacted more accommodative policies. In late July, the Central Bank granted close to USD 500 million in loans to the private sector, while the government presented a USD 431 million fiscal stimulus plan in early September to rekindle economic activity growth. Meanwhile, in late September the government’s cabinet approved a 2018 budget that includes a double-digit increase in expenditure and a projected reduction in the fiscal deficit to 2.2%.

Economic growth is expected to regain traction in H2 as authorities resort to expansionary policies to reignite growth. Healthy remittance inflows are expected to continue shoring up household consumption growth while reconstruction efforts in some tourist areas could pave the way for a return to growth of fixed investment. The FocusEconomics panel expects growth of 5.0% this year. Next year, domestic demand is expected to lose some strength and panelists see growth of 4.6%, which is unchanged from last month’s forecast.

PANAMA | Stellar H1 performance to carry over into H2

The economy expanded a healthy 5.4% in annual terms in the second quarter, according to recent national accounts data. Despite decelerating from the previous quarter’s multi-year high, economic activity remains buoyant driven by an expansion in all economic sectors. The healthy economic momentum is expected to carry into H2 even though a high base effect, coinciding with the opening of the expanded Panama Canal in June of last year, should result in lower year-on-year growth prints of monthly economic activity and quarterly GDP. Nevertheless, ongoing double-digit growth in Panama Canal revenues and cargo movements in ports along with construction of large-scale infrastructure projects should propel the country to the top of the list of fastest-growing economies in Central America for both this year and next.

The economy is expected to continue growing at a steady pace next year. The positive spillover of Panama Canal revenues into trade-related sectors and construction of large infrastructure projects should be the two main engines of growth. FocusEconomics Consensus Forecast panelists project that the economy will grow 5.5% in 2017. The panel expects GDP to expand 5.6% in 2018%, which is unchanged from last month’s forecast.

COSTA RICA | Economic growth picks up pace in Q2 on healthy external sector

The economy has performed well in recent months, despite the government’s continued fiscal difficulties. Recently-released data showed that growth in Q2 was driven by a strong external sector, which more than offset a sluggish domestic sector. Q3 likely displayed similar dynamics as Q2: Exports grew strongly in both July and August although a drop in consumer confidence in August—partly due to more pessimistic expectations regarding future family incomes and interest rates—does not bode well for the domestic sector. On 3 October, Moody’s downgraded the state-owned Bank of Costa Rica’s credit rating from Ba2 to Ba3 as a result of mounting corporate governance concerns following the “Cementazo” political scandal in which the commercial bank lent money under irregular conditions. On 5 October, Tropical Storm Nate left devastation in its wake after striking Costa Rica. The extent of the economic damage from this will become clearer in the coming days and weeks.

The government’s fiscal difficulties, marked by high debt levels and persistent fiscal deficits, burdens the outlook for the Costa Rican economy, as does the relatively high unemployment rate. However, a strong external sector should continue to prop up the economy, with key export markets such as the U.S. performing strongly. The FocusEconomics Consensus Forecast panel sees GDP expanding 3.9% this year. In 2018, it again foresees a 3.9% expansion, which is up 0.1 percentage points from last month’s projection.

INFLATION | Inflation inches up in August

Inflation accelerated timidly for a second consecutive month in August, inching up to 3.4% from 3.3% in July. Higher inflation was seen in Belize, the Dominican Republic, El Salvador, Honduras, Nicaragua and Panama, which more than offset lower inflation in Costa Rica and Guatemala. The remaining countries in the region saw steady inflation for the month.

Despite the recent pick-up in energy prices and potentially higher food prices following Hurricane Nate in Central America and Hurricanes Irma and Maria in the Caribbean, panelists cut their 2017 inflation estimates by 0.1 percentage points to 2.9% this month. Next year, Consensus Forecast panelists expect inflation to experience a moderate acceleration to 3.3%, which is down 0.1 percentage points from last month’s estimate. 

Written by: David Ampudia, Senior Economist