Central America & Caribbean Outlook - January 2016
January 19, 2016
Growth picks up in Q3
Growth in the Central American and Caribbean region picked up slightly in Q3 2015. A more complete set of data suggest that the region’s economy likely increased 3.1% year-on-year in Q3, marking an improvement over the 2.6% expansion recorded in Q2. That said, the momentum is likely to have carried over into Q4, as projections suggest that regional growth picked up to a 3.9% expansion in the last three months of 2015.
External developments are highlighting a divergence in regional development. On the one hand, countries in the region with closer ties with the United States are benefitting from the gradual recovery of the U.S. economy. Falling oil prices also provided a boost, in particular to energy importers. On the other hand, declining prices for oil, metals and agricultural goods are negatively affecting the performance of commodities exporters.
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Oil exporters drag down outlook
The economic outlook for the region deteriorated this month as the impact of low oil prices is driving down prospects for oil exporters in the region—in particular Trinidad and Tobago. Analysts participating in this month’s FocusEconomics Consensus Forecasts see the region’s GDP increasing 3.1% in 2016, which is down 0.1 percentage points from last month’s projection.
Despite this month’s downward revision, Central America and the Caribbean is still set to outperform Latin America, which is expected to grow only a timid 0.3% in 2016. In 2017, Central America and the Caribbean is expected to grow 3.2%, which is also down 0.1 percentage points from last month’s projection.
Looking at the countries in the region, the outlook for 2016 was revised down for Belize, Guatemala, Haiti and Trinidad and Tobago. Forecasters left their GDP growth projections unchanged for all of the other economies included in the survey except El Salvador and Honduras whose GDP growth forecasts were revised up. Panama is projected to be the region’s fastest-growing economy this year, with an estimated 6.3% expansion. The Dominican Republic remains close behind with a projected 5.1% growth rate. Puerto Rico will be the worst performer as its economy is foreseen contracting by 0.7%.
COSTA RICA | Economy accelerates in Q3 as concerns about fiscal reform mount
Data released by the Statistical Institute showed that the economy expanded 3.0% in Q3 2015 over the same period of the previous year, marking an acceleration from the 2.7% tallied in Q2. The reading came on the back of robust growth in domestic demand, in particular fixed investment. The momentum is expected to continue as manufacturing showed signs of recovery in H2 2015 and the monthly index of economic activity tallied its best result since June 2014 in November. Meanwhile, the World Bank warned the Costa Rican government of the necessity to pass the fiscal reform. The Bank raised concerns that the fiscal deficit could compromise access to short-term funds and trigger an economic deceleration this year. The warning came amid the Costa Rican government’s request for a loan from the World Bank and the Inter-American Development Bank after having failed to secure a USD 1 billion loan from China.
Costa Rica’s growth prospects are encouraging as domestic demand is expected to remain high and external demand is expected to recover this year. However, structural challenges such as corruption, inadequate infrastructure and a worsening fiscal situation pose downside risks. FocusEconomics panelists see the economy expanding 3.6% in 2016, which is unchanged from last month’s projection. The panel foresees GDP growing 3.7% in 2017.
DOMINICAN REPUBLIC | Central Bank confirms strong performance in 2015
Economic growth was robust throughout 2015, supported by strong government spending and double-digit growth in fixed investment. Preliminary data from the Central Bank show that the economy expanded 7.0% last year, which was slightly down from the 7.3% increase tallied in 2014. Nevertheless, growth was strong and the figure represented the second-highest reading in five years. Last year’s increase was supported by impressive growth in the construction sector. Moreover, the service sector, which represents a good share of the country’s GDP, accelerated over the previous year. The Bank stated that developments in the external sector were encouraging as the current account deficit as percentage of GDP was the smallest in over a decade and international reserves jumped to a multi-year high.
This year, the economy will likely decelerate compared to 2015 and grow at a more sustainable level. A recovery in the agriculture sector and a pickup in external demand will support the economy going forward. FocusEconomics Consensus Forecast panelists expect the economy to grow 5.1% in 2016, which is unchanged over last month’s projection. For 2017, the panel projects GDP to increase 4.3%.
GUATEMALA | Economy gains traction in Q3, recent indicators suggest continued positive momentum
Guatemala’s economy regained traction in Q3 2015. GDP growth strengthened from Q2’s 3.4% to 3.9% as rising private consumption and fixed investment more than compensated for weak performance in the external sector and falling public spending. Incoming indicators suggest that the economy ended 2015 on a robust note: economic activity expanded steadily in October and November and remittances—a main anchor of household spending—recorded double-digit expansions in both November and December. In the political arena, political newcomer Jimmy Morales took office as President on 14 January. He will likely face strong pressure to meet voters’ high expectations and to deliver on his anti-corruption election promises. However, his political isolation and his party’s limited representation in the divided Congress point to slow policy implementation and it remains to be seen if the new government will be able to implement significant reforms and tackle persisting challenges such as extensive crime and considerable emigration to the U.S.
Guatemala’s economy is expected to have expanded a solid 4.1% in 2015. Uncertainties regarding the new government and the country’s future political course are clouding this year’s outlook. FocusEconomics Consensus Forecast panelists expect the economy to decelerate to a 3.5% expansion in 2016, which is down 0.1 percentage point from last month’s forecast. For 2017, panelists expect stable growth of 3.5%.
PANAMA | Legal disputes delay Canal expansion as economy slows in Q3
The Panamanian economy expanded 5.6% over the same quarter of the previous year in Q3, which marked a slight deceleration from Q2’s 5.8% growth. Growth in Q3 was driven by a notable expansion in the industrial sector, while the all-important service sector tallied modest growth as international commerce and trade in the Colon Free Trade Zone was constrained by subdued demand from Panama’s trading partners. Meanwhile, the legal disputes between the Panama Canal Authority (ACP) and GUPC—the four-company consortium expanding the Canal—have not dissipated. GUPC accused the ACP of recurring payment delays and stated that the expansion could be further delayed until October if the ACP fails to deliver the latest USD 190 million payment installment. Despite this panorama, the Panamanian president reiterated that he expects the expanded Canal to be inaugurated in May.
Ongoing strength in Panama’s diverse service-oriented sectors and substantial public investment will continue to foster growth going forward. FocusEconomics Consensus Forecast panelists expect the economy to expand 6.3% in 2016, which is unchanged from last month’s projection. For 2017, the panel forecasts growth of 6.1%.
INFLATION | Regional inflation slowed down in November 2015, outlook for 2016 remains unchanged
Inflationary pressures in Central America and the Caribbean are expected to remain contained for the remainder of 2015. A FocusEconomics estimate showed that inflation in the region moderated from 2.1% in October to 2.0% in November. Inflation hovered around 2.0% for three months straight and is expected to have moderated at the end of 2015.
Forecasters polled by FocusEconomics this month see inflation ending 2016 at 2.8%, which would mark an acceleration over the 1.5% expected for the end of 2015. The 2016 inflation forecast was unchanged compared to the previous month. Higher inflation projections for two of the twelve economies surveyed (Panama and Jamaica) offset lower projections for Costa Rica, the Dominican Republic, El Salvador, Guatemala, Haiti and Nicaragua, while forecasts for Belize, Honduras, Puerto Rico and Trinidad and Tobago were left unchanged. Panelists expect regional inflation to accelerate and end 2017 at 3.1%.
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