Central America Economic Outlook December 2016

Economy set for tepid growth again in H2

Central America: Economy set for tepid growth again in H2

December 7, 2016

The economy of Central American and the Caribbean decelerated in the first half of the year and data from key countries show that the region is set to expand at another tepid rate in the second half. The Dominican Republic—the biggest economy in the region—grew 5.8% year-on-year in Q3 supported by an improvement in the construction and mining sectors. The figure marked a deceleration over the previous quarter’s growth, but it represents a strong expansion compared to other countries in the region. In the same quarter, Panama’s economy was undermined by a challenging external environment. While official GDP data are not available yet, the average economic activity reading for the three months up to September suggests a deceleration.  

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The region has benefitted so far this year from the recovery of the U.S economy, given the strong ties through exports and remittances. This positive effect is likely to offset the tightening of financial conditions that will result from monetary policy normalization in the U.S. That said, expectations that the U.S President-elect Donald Trump will implement harsh immigration reforms once in office is a cause of concern. A crackdown on immigration would threaten remittances flows in the region, which represent a significant source of growth. 

Analysts revise down 2017 GDP growth forecast marginally

Economic growth is expected to accelerate next year and the region will expand at a faster pace than Latin America. Our analysts expect GDP to grow 3.1% in 2017, which is down 0.1 percentage points from last month’s estimate. This month, the 2017 outlook was revised down for six countries including the Dominican Republic and Guatemala. GDP growth forecasts were revised up for HaitiHonduras and Trinidad and Tobago while estimates for the rest of the countries were left unchanged. Next year’s increase represents a marginal acceleration over the 2.9% expansion expected for this year.

Panama will be the fastest growing economy next year with an expected growth rate of 5.7%. In contrast, the economies of Puerto Rico and Trinidad and Tobago, in that order, are expected to be the worst performers. 

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COSTA RICA | Economy loses momentum in Q3

The September monthly index of economic activity confirmed the slowdown that has been in place since June, which, combined with the weak readings in July and August, points to a further deceleration in Q3. On 29 November, after a long legislative process, the Parliament approved the 2017 budget that was issued by an economic affairs commission in October. The budget, which envisages substantial cuts to the first draft proposed by the executive in September, was approved via a lack of quorum as members of the opposition left the parliament during the vote. While lawmakers cut the resources the government had planned to distribute to several institutions, government officials maintained that it could seriously compromise the activity of such entities. The northern part of the country is reeling from the impact of Hurricane Otto, which took a devastating toll on the region at the end of November and will cause the government to take extraordinary measures.

Costa Rica’s economy will continue to be hampered by the harsh fiscal consolidation. However, solid private consumption and recovering exports will contain the deceleration. Analysts surveyed by FocusEconomics expect the economy to expand 4.0% in 2016. For 2017, the panel expects GDP growth of 3.9%, which is down 0.1 percentage point from last month’s forecast.

DOMINICAN REPUBLIC | GDP expands at remarkable rates in 2016

The Dominican economy showed remarkable dynamism in the first nine months of the year, growing at a rate of almost 7% on an annual basis. The robust expansion came on the back of the notable performance of the mining (especially gold), construction, agriculture and financial sectors. Growth was also supported by a significant increase in remittances and by a buoyant tourism industry, which continued to grow in October—both of which were bolstered by the strength of the U.S. economy. On 18 November, Fitch upgraded the Dominican Republic’s rating from B+ to BB-, and assigned a stable outlook. The ratings agency cited as reasons the robust growth momentum as well as the reduced external vulnerabilities and the improved fiscal responsibility shown during the 2016 election cycle. 

The economy is forecast to grow at the fastest rate in the region this year. Next year, growth should remain robust but will moderate, as oil prices will likely gain ground and financing conditions will tighten as a result of the Fed’s more restrictive monetary policy, slowing fixed investment. Analysts expect the economy to expand 6.0% in 2016. For 2017, the panel projects that GDP will increase 5.0%, which is down 0.1 percentage points from last month’s projection.

GUATEMALA | Political uncertainty at home and in the U.S threatens the economy in 2017

The Guatemalan government reacted swiftly after Donald Trump’s victory in early November and has ramped up the country’s consular presence in the United States. Donald Trump’s incendiary campaign rhetoric on immigration has been cause for much concern in Latin America. According government estimates, roughly 1.5 million Guatemalans live in the U.S., or just under 10% of the country’s total population, and about two thirds are thought to be there illegally. A crackdown on immigration would threaten remittances flows to Guatemala, which represent about 10% of GDP and could therefore seriously affect the economy’s health. The Guatemalan economy has been growing robustly in large part thanks to record flows of remittances.

Political uncertainty at home and in the U.S. could potentially harm the country’s fragile economic recovery next year. FocusEconomics Consensus Forecast panelists expect that the economy will grow 3.5% this year. Next year, the panel expects GDP to inch up to 3.6%, which is down 0.1 percentage points from last month's forecast.

PANAMA | Economy set to accelerate next year

A challenging external scenario is constraining the Panamanian economy. The three monthly economic activity readings from Q3 suggest that the economy continued to decelerate despite the expanded Panama Canal opening in late June, reflecting the challenges the small open economy is facing. Despite the disappointing data, the country’s economy remains on a solid footing. In the first three quarters of the year, cargo tonnage through the Canal increased by over 20% and the fiscal deficit narrowed. The drop was underpinned by a surge in tax collection, which more than offset an increase in both current spending and capital expenditure, with both increasing at a fast pace in comparison to Panama’s regional peers. 

The country is expected to accelerate slightly next year as growth will be supported by large-scale infrastructure projects and an increase in Panama Canal revenues. Risks nevertheless persist as sluggish global trade and growing uncertainty abroad could dampen growth prospects. Analysts expect the economy to expand 5.3% this year and 5.7% next year, which is down 0.1 percentage points from last month’s forecast.

INFLATION | Inflation inches down in October     

Inflation continued the downward slide in October and hit 2.4%. The figure was slightly below the 2.5% recorded in the previous month and marked the lowest reading in nearly a year. Lower inflation in four countries, including the Dominican Republic and Nicaragua, offset higher inflation in five countries, including Panama and Puerto Rico.

Our December Consensus Forecast estimates inflation of 3.1% next year, which is unchanged from last month’s estimate. Next year’s inflation forecast represents an increase over this year’s 2.4% estimate. 

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Written by: Dirina Mançellari, Senior Economist

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