Central America Economic Outlook July 2017

Regional economy accelerates further in Q1

Central America: Regional economy accelerates further in Q1

July 11, 2017

The economy of the Central American and Caribbean region accelerated for a second consecutive quarter in Q1, according to a more comprehensive set of data. The region’s economy expanded 3.0% in annual terms, which was above the 2.8% increase observed in the previous quarter but marked a slight downward revision from last month’s 3.1% estimate for the region. The marginal downgrade was the result of disappointing growth in the Guatemalan economy, which failed to fire on all cylinders despite improved regional trade flows and record growth in remittances. 

Elsewhere in the region, growth in Nicaragua surprised on the upside in Q1 on account of bumper growth in agricultural exports and resilient domestic demand. The Honduran economy also grew at a markedly faster clip as it benefited from a sharp increase in remittances from the U.S. and upbeat dynamics in the external sector. Meanwhile, the Belizean economy reemerged from recession in Q1 following four quarters of falling activity. Looking at the heavyweights in the region, Panama was the quarter’s star. Its economy roared through Q1 as increased trade flows in the region spilled over into the country’s trade-oriented sectors. The economy of the Dominican Republic continued to decelerate as growth approached its long-term potential, while Costa Rica’s growth decelerated to a nearly three-year low as both the domestic and external sectors disappointed.

The economy is expected to have grown at a steady pace in Q2, as several of the tailwinds that are boosting growth remain in place. Nonetheless, the region’s main headwinds—chiefly centered in the fiscal arena—have not dissipated either. Recent developments are encouraging, however: in late June, the Honduran and Guatemalan governments kicked off a customs union that will allow 80% of exports and travelers to cross the border without paying tolls. Estimates by the Economic Commission for Latin America and the Caribbean (ECLAC) suggest the union could increase annual GDP growth in both nations by about 1.2%, while it pencils in additional tax revenues of up to USD 40.0 million per month between both states. While only time will tell what the true impact of the union will be, the launch marks a milestone for the region’s economic integration—a century-old issue. Meanwhile, U.S. unemployment data for June saw payroll numbers growing at a very solid pace, which indicates that the upturn in remittance inflows across the region still has wind in its sails.

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

Projections left unchanged for second consecutive month

FocusEconomics panelists left their overall projection for the Central American and Caribbean regional economy unchanged in July, the second consecutive time they have done so. Analysts had downgraded the projection in May due to fiscal distress in several economies and lingering uncertainty linked to the U.S. trade and migration agenda. Our analysts expect GDP to expand 3.0% both in 2017 and 2018. 

The projection for GDP growth in 2017 was revised down for Haiti as the country continues to suffer from the effects of a devastating hurricane and a prolonged political standoff. The remaining countries in the region saw no change in their forecasts. 

The Panamanian and Dominican economies are set to be the best performers this year, growing 5.4% and 5.2%, respectively. In contrast, Puerto Rico’s economy will be the region’s laggard as it remains engulfed in its never-ending debt saga.   

Get the Full FocusEconomics Central America & Caribbean Report  

COSTA RICA | Growth disappoints in Q1

GDP growth slowed unexpectedly to a three-year low in Q1 as both the domestic and external sectors eased considerably. Domestically, it is likely that consumer spending suffered in Q1 from the weakening of the colón. The external sector, for its part, contributed negatively to growth for the first time in more than a year as higher imported fuel prices in Q1 outpaced modest exports growth. Q2, however, looks to have gotten off to a better start: the IMAE accelerated in April, the currency has stabilized since May’s rapid depreciation, and the external sector improved slightly in both April and May.

Despite a weak Q1, the economy is expected to grow at potential this year on the back of healthy full-year growth in private consumption and a rebound in fixed investment. That said, weaker terms of trade and an ineffective legislature in the run-up to next year’s elections are clouding the outlook as necessary fiscal tightening is expected to be put off for another year. FocusEconomics Consensus Forecast panelists expect the economy to expand by 4.0% in 2017, which is unchanged from last month’s forecast. In 2018, they see GDP growth edging down to 3.9%.

DOMINICAN REPUBLIC | Growth in economic activity continues to ease despite government support

The country is performing well compared to its regional peers, although some signs of slowing growth have emerged. Economic activity decelerated slightly in May for the fourth consecutive month to record the slowest growth in nearly four years. However, tourism revenues rose in the same month partly due to ramped up attempts by the government to increase tourism. Exportsrebounded strongly in March, suggesting that overall activity remains sound. In other news, following the Odebrecht scandal, over a dozen people, including government officials, have been charged with crimes that range from accepting or offering bribes to money laundering. Meanwhile, the OECD upgraded the country’s Tax Transparency rating to ‘largely compliant’ with the institution’s standards, which bodes well for the functioning of the economy.

The economy is expected to grow robustly this year thanks to healthy fixed investment and private and public consumption. FocusEconomics analysts expect the economy to expand 5.2% in 2017, which is unchanged from last month’s forecast, and 4.6% in 2018.

GUATEMALA | Record-high remittance inflows points to solid Q2 growth

The economy seems to be on a broadly steady footing. GDP grew 3.0% in annual terms in Q1 as fixed investment surged and households benefited from record growth in remittances and steady credit growth. In addition, the external sector’s negative contribution to growth mostly reflected buoyed imports growth, a further sign of strengthening domestic demand. Looking into Q2, the Central Bank’s economic activity indicator registered another month of strong growth in May and remittances reached a fresh record high in June, which suggest that economic momentum built up throughout the quarter. The external sector will also benefit in upcoming quarters from the launching of a customs union with Honduras, which came into force in late June. 

The economy will expand at a solid rate this year on account of less restrictive fiscal policy, which will shore up public capital expenditure growth and household spending. The latter will also find support in the robust inflow of remittances, which continues to benefit from a healthy U.S. labor market. FocusEconomics Consensus Forecast panelists forecast that GDP will grow 3.6% in 2017, which is unchanged from last month's estimate. In 2018, the panel expects GDP growth of 3.5%. 

PANAMA | Strong Q1 economic momentum carries into Q2 

The economy had a spectacular start to the year boosted by a recovery in the country’s trade-related sectors. GDP expanded at a two-year high rate in the first quarter and the most recent data points to solid momentum in the economy as Panama continues to benefit from improving international trade dynamics. Economic activity expanded solidly in April and cargo movements in Panamanian ports were up 12.6% in the first five months of the year. Latest estimate project that fiscal transfers from the Canal to the central government are expected to increase 60% and total USD 1.6 billion in the current fiscal year. Improvement in tax collection coupled with higher earnings have contributed to lowering the fiscal deficit to 1.9% despite large investments in infrastructure. 

Panama is set to be the fastest-growing country in the region this year on the back of ongoing infrastructure projects and high dividends from the Panama Canal. Nevertheless, a slower-than-expected economic recovery both at a global level and in the region could dampen trade and therefore the country’s growth prospects. Analysts expect the economy to expand 5.4% in 2017, which is unchanged from last month’s forecast, and 5.7% in 2018. 

INFLATION | Inflationary pressures ease in May

Inflation eased slightly from an over two-year high of 3.7% in April to 3.6% in May, putting an end to five consecutive months of accelerating inflation. Lower inflation was seen in Belize, the Dominican Republic, Guatemala, Jamaica, Nicaragua and Panama. Conversely, inflation continued to trend higher in Costa RicaEl Salvador, Haiti and Puerto Rico. Meanwhile, preliminary data for June shows inflation decelerating further to 3.5%.

Our Consensus Forecast panelists lowered their inflation estimates for 2017 to 3.2%, down 0.1 percentage points from last month’s forecast. For 2018, they see inflation at 3.4%.Get the Full FocusEconomics Central America & Caribbean Report

Written by: David Ampudia, Senior Economist

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