Central America: Growth expected to have picked up in Q3 following weak Q2 print
December 7, 2017
Economic growth in the Central American and Caribbean economy is expected to have firmed up in the third quarter of the year, with growth regaining momentum in the Dominican Republic and economic activity remaining resilient across the region’s other heavy hitters. Regional GDP is expected to have increased a moderate 2.7% in Q3 amid ongoing fiscal concerns and natural disasters. The result was nonetheless above the 2.3% growth rate in Q2, an over six-year low.
Although Q3 GDP data for most countries in the region is still outstanding, leading indicators for the Panamanian economy suggest growth moderated slightly in the third quarter. The deceleration was, however, largely reflective of a strong base year effect following the opening of the expanded Panama Canal last year, the benefits of which continue to be seen across domestic trade-dependent sectors. High-frequency indicators for the Dominican Republic suggest economic activity strengthened in Q3 as a result of the Central Bank’s measures aimed at facilitating credit lending to the private sector and strong remittance inflows from the United States. Despite heightened political noise, growth in Guatemala is estimated to have picked up slightly on robust remittances and stronger manufacturing and services activities.
Political events continued to dominate headlines in recent weeks. Honduras plunged into its most severe political crisis in nearly a decade following a disputed presidential election held on 26 November. The official vote count was plagued by delays and server failures as allegations mounted against the electoral commission claiming that votes were rigged and irregularities favored incumbent President Juan Orlando Hernández. The situation worsened in early December as the government declared a 10-day curfew and authorized police and the military to crack down on the opposition. The situation risks severe economic fallout, disrupting domestic activity and cooling investor appetite.
2018 growth prospects remain depressed because of fiscal imbalances and political uncertainty
The regional economic outlook remains bleak, with potential growth weighed down by large domestic imbalances and acute political noise. A number of countries across the region continue to suffer from elevated fiscal deficits and massive debt repayment obligations, with Costa Rica, El Salvador and Puerto Rico especially at risk. In addition, while the economic impact of the ongoing political unrest in Honduras has yet to be seen, a further deterioration of the situation in Honduras could severely impact the region’s 2018 outlook. The FocusEconomics panel expects growth to come in at 3.0% next year, which is unchanged from last month’s forecast. In 2019, growth will pick up pace to 3.3%.
The stable 2018 economic outlook for the region reflects unchanged projections for a third of the economies surveyed, including the Dominican Republic. Projections were upgraded for Haiti, Honduras and Nicaragua, while the forecasts of 5 of the 12 economies covered in the region were cut, including Costa Rica, Guatemala and Panama.
The economies of Panama and the Dominican Republic are set to be the best performers in the region next year, growing 5.5% and 4.6%, respectively. Economic momentum in these two countries will continue to benefit from robust global trade flows and a strong economy in the United States. In contrast, Puerto Rico’s economy is expected to remain the region’s worst performer and contract 1.8% in FY 2018, which ends in June 2018.
Head on over to our Central America page for more recent economic news on the region.
GUATEMALA | Hopes of an economic rebound in H2 grow dimmer
Sluggishness in the economy remains apparent; after posting the weakest quarter of GDP growth in nearly seven years in Q2, prospects for a strong turnaround in the second half of the year appear increasingly uncertain. That said, recent data shows economic activity ticked up slightly in September from August on higher turnover in the manufacturing and service sectors. Remittances from abroad have also been on a tear in the past few months on the strength of the U.S. economy, most recently notching impressive growth in October. Moreover, the depreciation of the quetzal since September’s political crisis should lift exports through the remainder of the year, while a recent industry report points to strong coffee exports this year thanks to robust harvests. President Jimmy Morales continues to ignore calls for his resignation in the wake of corruption allegations. In November, Morales urged Congress to approve next year’s budget, which is set to include increased public investment and add to the public debt.
Despite a weak first half of the year, GDP growth is expected to be more solid in the second half of the year. In the medium term, robust remittance inflows are expected to sustain solid growth in household spending and grow the low tax base. That said, ongoing political scandals have upset business confidence and will cap the private sector’s willingness to invest. Our panelists forecast that GDP will grow 3.3% in 2018, which is down 0.1 percentage points from last month's forecast, and 3.5% in 2019.
DOMINICAN REPUBLIC | Tourist arrivals decline again because of hurricanes
The economy seems to have found its footing following a lackluster performance through most of Q2 and Q3, the latter partly the result of severe disruptions in economic activity caused by Hurricanes Irma and Maria. A looser monetary stance and measures implemented by the Central Bank have proven successful at shoring up growth in credit lending to the private sector as well as increasing the money supply, annual growth of which stagnated in June but has been accelerating since. Remittances up to September recorded another double-digit growth rate, which likely provided some support to private spending in the third quarter. However, the country is not completely out of the woods: Tourism arrivals for October showed a second consecutive decline compared with the previous year; the Central Bank has attributed this to the hurricane-induced temporary shutdown of tourist facilities in the north-east of the country.
Our panelists expect economic activity to regain some momentum in the second half of the year. GDP growth will be buoyed by the Central Bank’s accommodative monetary measures as well as by the government’s USD 431 million fiscal stimulus package aimed at rekindling growth. External forces will also support the domestic economy: A weaker peso will boost the country’s exports next year, while healthy remittance inflows will buttress household spending. FocusEconomics panelists expect GDP of 4.6% next year, unchanged from last month’s forecast. For 2019, panelists see the economy expanding 4.5%.
PANAMA | Upbeat trade dynamics continue to boost country’s outlook
Recent data suggests that the Panamanian economy lost steam in the third quarter. The three-month average of monthly economic activity, an estimate for quarterly GDP, came in at 4.4% year-on-year in Q3. The estimated average was below Q2’s 5.4% annual GDP expansion. The deceleration largely reflects a high base effect following the opening of the expanded Panama Canal in June 2016. The expanded Panama Canal is, however, having positive spillovers on the economy. Cargo movements in Panamanian ports expanded 12.6% in year-on-year terms in Q3, and ship transit in the Panama Canal increased 6.0% in the January–August period compared to the corresponding period in 2016. In November, Panama and the People’s Republic of China formalized diplomatic relations. Both governments signed a series of deals that should boost Panama’s trade-related sectors and open the door for large infrastructure investments in the country.
The economy should grow at a broadly stable pace next year on healthy activity in the service and construction sectors. A stronger-than-expected regional economic recovery and faster growth in maritime trade should provide an additional boost to the country’s trade-related sectors. FocusEconomics Consensus Forecast panelists project that the economy will grow 5.5% in 2018, which is down 0.1 percentage points from last month’s forecast. The panel expects GDP to expand 5.3% in 2019.
COSTA RICA | Economic momentum moderates heading into Q4
Recent data shows that the economy is slowing somewhat as it approaches the end of an otherwise solid year of growth. Annual economic activity, as measured monthly by the Central Bank, moderated in September due to weaker performances in the construction, and mining and quarrying sectors, but was supported by a recovering agricultural sector. On 9 November, the government presented a revised congressional proposal designed to increase urgently-needed fiscal sustainability from next year, after a previous reform attempt was unsuccessful. The proposal includes caps on public salaries, a move towards a rule-based fiscal framework and a replacement of the current sales tax with a value-added tax. Meanwhile, according to the Costa Rican National Emergency Commission, damages caused by Tropical Storm Nate—which affected Costa Rica on 5 October—approximated to USD 365 million.
A strong external sector should continue supporting the economy next year, with key export markets such as the U.S. expected to perform strongly. However, the government’s fiscal difficulties, including high debt levels and persistent fiscal deficits; the impact of Tropical Storm Nate; and creeping inflationary pressures weigh on the outlook. The FocusEconomics Consensus Forecast panel sees GDP expanding 3.7% in 2018, which is down 0.1 percentage points from last month’s projection. In 2019, the panel foresees a 3.8% expansion.
INFLATION | Inflation stabilizes in October
Regional inflation was steady at September’s 3.9% in October, putting an end to three consecutive months of accelerating price pressures. Inflation eased in the Dominican Republic, El Salvador, Guatemala and Panama, while inflationary pressures strengthened in Belize, Costa Rica, Honduras, Nicaragua and Jamaica.
Faltering price pressures and a weak economic outlook prompted the Central Bank of Guatemala to ease monetary conditions in late November, while high inflation expectations in Costa Rica caused the Central Bank to tighten monetary conditions in the same month. Elsewhere in the region, central banks remained on hold in November.
Rising global commodity prices and accelerating regional economic growth are expected to push inflation in 2018 to 3.4%, which is up 0.1 percentage points from last month’s estimate. In 2019, Consensus Forecast panelists expect inflation to inch up to 3.5%.
Written by: David Ampudia, Senior Economist