Central America & Caribbean Economic Outlook April 2017

Tourism, remittances and stronger global demand propel growth in Q4

Central America & Caribbean: Tourism, remittances and stronger global demand propel growth in Q4

April 12, 2017

Although economic activity decelerated markedly last year, growth in Central America and the Caribbean gained some steam at the end of 2016. According to preliminary estimates, the region expanded 2.8% annually in Q4 2016, marking an acceleration from Q3’s 2.1% rise. The region’s economy is benefiting from a strengthening labor market in the United States, which is boosting all-important remittances. Rising tourist arrivals in some countries, higher commodity prices and an uptick in global demand are also spurring economic growth in Central America and the Caribbean. Q4’s growth momentum has likely carried into Q1, with our panel of analysts estimating that the region’s GDP expanded 3.0% in Q1.

Despite the good start to the year, mounting economic and political challenges threaten to derail Central America and the Caribbean’s slow-but-steady recovery. While uncertainties about U.S. President Donald Trump’s immigration policies do not bode well for all-important remittance flows from the U.S., the possibility of Trump’s administration implementing restrictive trade policies could distort trade flows between the region and its powerful northern neighbor. Moreover, a faster-than-anticipated tightening policy by the Federal Reserve could heighten financial and exchange rate volatility in the region. On the domestic side, large fiscal imbalances in some countries are limiting the government’s ability to provide fiscal stimuli to their economies. Furthermore, the increase in oil prices is eroding households’ purchasing power, hurting private consumption.

Head on over to our Central America & Caribbean page for more recent economic news on the region.

2017 economic outlook improves for first time in eight months 

Despite mounting economic woes, FocusEconomics panelists decided to upgrade the region’s economic outlook for the first time since September 2016 as Q4’s positive growth momentum carried over into the first quarter. The economies of Central America and the Caribbean will expand at a faster pace this year. Our analysts expect GDP to rise 3.1% in 2017, which is up 0.1 percentage points from last month’s estimate. This month, growth projections were revised up for Costa Rica, the Dominican RepublicEl Salvador and Puerto Rico. Forecasts were revised down for Guatemala, while they were left unchanged for the other seven countries, including Nicaragua and Panama. Our analysts expect growth to stabilize at 3.1% in 2018.

Panama will be the fastest growing economy this year with an expected growth rate of 5.4%, followed by the Dominican Republic and Nicaragua, in that order. In contrast, Puerto Rico’s economy will contract again in 2017 as the island’s debt saga continues to weigh on the economy. 

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COSTA RICA | Fiscal woes cloud the country’s outlook

The economy expanded healthily in 2016 and growth picked up in the final quarter on the back of strong private consumption. Momentum looks to have eased in the early months of 2017, however, with economic activity growth slowing in the three months up to February. Fiscal concerns are also plaguing the country and two of the three major credit rating agencies have recently downgraded their rating while the third maintains a negative outlook. With fiscal reforms stalled in the Legislative Assembly, solutions to the country’s increasingly expensive debt burden in the short term seem unlikely—especially given that next year’s general election campaign season is already heating up. However, the collection of tax revenues has surged so far in 2017, providing a single bright spot amid the country’s fiscal woes.

Growth should remain healthy this year on the back of robust private consumption and solid fixed investment growth. FocusEconomics Consensus Forecast panelists expect the economy to expand 4.1% in 2017, which is up 0.1 percentage points from last month’s estimate. In 2018, they see GDP growth edging down to 3.9%.

DOMINICAN REPUBLIC | Household spending and investment shore up growth in Q1

Although decelerating compared to last year’s outstanding performance, economic activity continued to expand robustly in the first months of 2017, as shown by the latest IMAE readings. Private consumption continues to be underpinned by strong growth in remittances, which in January recorded a double-digit increase, benefiting from a buoyant labor market in the United States. Moreover, strong lending growth throughout the first quarter of the year is supporting both private consumption and investment. Additional good news came from the tourism sector, which in the first two months of the year saw the number of tourist arrivals rising at a healthy pace, a testament to the improved supply of tourist services. On the downside, the Central Bank’s current tightening path could be somewhat restraining domestic demand, which started to decelerate in the second half of last year due to more restrictive financial conditions.

This year, growth will moderate but should nevertheless remain robust. Strong FDI inflows, growing remittances and yet another noteworthy performance of the tourism sector will continue to support growth, which will also benefit from increasing incomes. On the downside, rising financing costs could restrain fixed investment and lift the government’s interest burden, while a protectionist shift in the U.S. would dampen exports. FocusEconomics analysts expect the economy to expand 5.0% in 2017, which is up 0.1 percentage points from last month’s forecast, and 4.5% in 2018. 

GUATEMALA | Political developments remain in the spotlight

The political climate worsened in March, casting a shadow over the country’s fledgling economic recovery. On 8 March, a fire at a shelter for abused underage girls killed over 40 girls. The circumstances of the disaster drew widespread international condemnation and the social welfare minister was forced to step down. He was then arrested, along with other senior officials, and charged with negligent homicide. A motion was introduced in Congress to strip President Jimmy Morales of his presidential immunity so that he too can face charges. The motion has little chance of success, however. It is the latest episode in what has been a difficult start to the year for President Morales: his son and his brother were arrested on corruption charges in January and protests erupted in early March when the Odebrecht scandal reached Guatemala, with some demanding Morales’ resignation. In the midst of a rapidly deteriorating political situation, the government plans to issue USD 500 to 700 million in long-term paper on international bond markets in April. Adding to the country’s woes, the economy slowed down last year despite a small uptick in Q4, which is expected to carry over into Q1 2017.

The political climate at home and across the Gulf of Mexico risks undermining the country’s growth prospects this year. FocusEconomics Consensus Forecast panelists forecast that GDP will grow 3.6% in 2017, which is down 0.1 percentage points from last month's estimate. In 2018, the panel also expects GDP growth of 3.6%.

PANAMA | Economy starts 2017 on a stronger note

2016 was a challenging year as the country was beset by international scandals and sluggish economic activity. The small and open economy decelerated for the fifth consecutive year as it was dragged down by the region’s economic woes and flagging maritime trade. Although GDP expanded at the slowest rate since 2009 last year, Panama was among the fastest-growing economies in the region and the country’s economic fundamentals are solid and stable. The most recent economic data from January is encouraging, with economic activity expanding at the fastest pace in six months and cargo movements in Panamanian ports expanding by more than 12%. However, job contracts declined at an over double-digit rate in the first months of the year and car sales decelerated in January and February, pointing to challenges in the economy.   

The country should remain one of the fastest growing economies in the region on the back of ongoing infrastructure projects and high Panama Canal dividends. Nevertheless, growing protectionist rhetoric and a slower-than-expected global economic recovery could dampen trade. Analysts expect the economy to expand 5.4% in 2017, which is unchanged from last month’s forecast. For 2018, GDP is expected to grow 5.6%.

INFLATION | Higher commodity prices drive up inflation in February

Inflationary pressures continued to mount at the outset of the year, propelled mainly by higher energy prices. Comprehensive data for February shows that inflation jumped from 3.0% in January to 3.6%, which represented the highest print in over two years. The reading reflected higher inflation across the region, particularly in Belize, the Dominican Republic, Jamaica and Puerto Rico. Conversely, inflation receded in Haiti and Nicaragua.

Our Consensus Forecast panelists left their inflation estimates for 2017 unchanged at 3.2%, which is up 0.1 percentage points from last month’s estimate. For 2018, inflation is expected to increase to 3.4%.

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Written by: Ricard Torné, Head of Economic Research

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