Central America economic growth remains broadly stable in Q1

Central America economic growth remains broadly stable in Q1

The economy of the Central American and the Caribbean region accelerated last year on the back of an improvement in the U.S. economy, which positively affected the region’s trade and tourism sectors. Moreover, last year, private consumption benefited from an increase in real income amid falling inflation. GDP expanded 3.3%, which was up from the 3.0% increase tallied in 2014. Low oil prices coupled with high demand from the U.S. helped the economies of El SalvadorHonduras and Nicaragua to accelerate last year. Moreover, the Dominican Republic was the fastest-growing economy in the region in 2015 and expanded at a robust rate. Conversely, adverse weather conditions took a toll on growth in Belize and Haiti.

Preliminary data show that growth remained broadly stable in the first quarter of this year. Looking at individual countries in the region, the Dominican Republic expanded 6.1% on an annual basis, thus matching the previous quarter’s growth. Q1’s reading came on the back of stronger growth in the mining and quarrying sector and in the agricultural sector, while the service sector disappointed and decelerated over Q4’s expansion. Moreover, in the first quarter,Jamaica’s economy accelerated to a 0.9% rise amid an increase in tourist arrivals and an expansion in the agricultural sector. In the political arena, in the Dominican Republic’s presidential and general elections that were held on 15 May, President Danilo Medina was re-elected with nearly 62% of the vote and his party secured the majority in both chambers of Parliament. With Medina set for another presidential term, no major change in terms of economic policy is expected in the near future.  

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Outlook stabilizes in June

This year, the region is expected to decelerate slightly over last year, yet growth is still projected to be faster than in Latin America. The Central American and the Caribbean region will continue to benefit from the recovery in the U.S. and from low oil prices. In June, the GDP outlook for the Central America and the Caribbean region did not change from last month's 3.0% growth. The economic outlook was left unchanged for 5 of the 12 economies surveyed, including Costa Rica and Panama. Conversely, GDP projections were downgraded for five economies, includingPuerto Rico and Trinidad and Tobago. The economies of the Dominican Republic and Guatemala were the only ones for which the outlook was revised up. The regional projection for 2017 also remained stable with GDP expected to increase 3.1%.

Panama will be the fastest-growing economy of the region this year followed by the Dominican Republic and Nicaragua. At the other end of the spectrum, Puerto Rico will likely be the worst performer as its economy is expected to contract by 1.3%.

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COSTA RICA | Economy gains traction in Q1

Despite a lack of progress in implementing fiscal reforms and soaring government debt, Costa Rica’s economy is gaining traction. Although the monthly indicator for economic activity ticked down in April, it still indicated robust growth. However, high public debt threatens to impede growth via its impact on the country’s credit rating. The fiscal deficit is expected to widen to 6.1% of GDP this year. President Luis Guillermo Solis has proposed legislation that aims to increase revenue and cut spending, however, the fractured Congress has so far resisted the bills.         

Costa Rica’s prospects are stable due to positive and negative factors offsetting each other. One-off effects stemming from the closure of a major computer chip manufacturing plant last year are fading from the data and domestic credit growth is picking up. On the other hand, the sizable government debt will drag on growth. Analysts expect the economy to expand 3.7% in 2016, which is unchanged from last month’s projection. The panel foresees GDP growing 3.8% in 2017. 

DOMINICAN REPUBLIC | Positive momentum carries over into the second quarter

The Dominican economy grew 6.1% annually in the first quarter of 2016 and more recent high-frequency data suggest that positive momentum carried over into the second quarter. According to the Central Bank, economic activity expanded in April at a stronger rate than in March. The expansion came mainly on the back of strong growth in the construction, financial and manufacturing sectors. The latest data on tourism also came as good news: tourist arrivals continued to grow at a healthy pace in April mainly due to improved conditions in the U.S. labor market. On the political side, the Electoral Council confirmed the victory of President Danilo Medina’s Dominican Liberation Party (PLD) in the presidential and legislative elections.

In 2016, the Dominican Republic will continue to be one of the fastest-growing economies in the region, although it will lose some strength. That said, the decrease in gold mining activity and the ongoing ban in Haiti on some imports from the Dominican Republic will restrain growth. Analysts expect the economy to grow 5.4% in 2016, which is up 0.1 percentage points from last month’s projection. For 2017, the panel projects GDP to increase 4.5%. 

GUATEMALA | Economic prospects remain positive amid an improvement in the external sector

Guatemala’s economy has proven robust amid weak external demand, inclement weather conditions and the political strife that characterized much of last year. However, economic activity slowed in the first months of 2016, likely as a result of a production slowdown in the agricultural sector. Guatemala’s monthly economic activity indicator increased over March to 3.4% in April. Although the increase is a good sign, it is well below last year’s average increase of 4.3%. On 31 May, the IMF issued the concluding statement of its 2016 Article IV mission and emphasized the challenges posed by the endemic corruption in the country. The IMF lauded the government’s attempt to reform judicial oversight in order to rectify this problem and suggested polices to strengthen transparency and support long-term growth.  

Guatemala’s economy is set to expand at a slower, but still robust, pace this year. While a pickup in exports will support the economy, domestic demand is expected to moderate somewhat from 2015’s solid readings. FocusEconomics Consensus Forecast panelists see the economy expanding 3.5% this year, which is up 0.1 percentage points from last month's projection. Next year, the panel expects GDP remaining unchanged at 3.5%.

PANAMA | Economy expected to benefit from substantial public investment

Sluggish global trade has been weighing on growth and the completion of large-scale infrastructure projects is not providing further impetus to the economy. Despite the headwinds, the country’s macroeconomic fundamentals remain robust and Panama is set to be the fastest-growing economy in the region. The opening of the expansion of the Panama Canal in late June is expected to double its capacity and unleash a wave of investment to accommodate increased demand. The government and a Chinese consortium agreed on a project to build a USD 900 million container port on the Atlantic side. Negotiations are currently under way between the government and various consortiums to build another port on the Pacific side.

Panama’s diverse service-oriented sectors and substantial public investment will keep external headwinds at bay and foster growth. However, subdued global demand and trade dynamics will weigh on the outlook. Analysts expect the economy to expand 5.9% in 2016, which is unchanged from last month’s projection. For 2017, the panel forecasts growth of 6.0%. 

INFLATION | Inflation remains unchanged in April  

More complete data show that inflation in the Central America and the Caribbean region was stable at March’s 2.8% in April. Higher inflation in the Dominican Republic and Costa Rica offset lower inflation rates compared to the previous month’s reading in Guatemala and Nicaragua. A preliminary estimate for May elaborated by FocusEconomics shows that inflation likely remained stable at 2.8%. Looking forward, inflationary pressures are expected to remain broadly stable this year.

Panelists polled by FocusEconomics in June expect the region’s inflation to average 2.5% this year, which is down 0.1 percentage points from last month’s estimate. The forecast was kept unchanged for 5 of the 12 countries surveyed, including Guatemala and Puerto Rico. On the other hand, the forecast was downgraded for five economies including Costa Rica and the Dominican Republic. Haiti, Jamaica were the only economies that saw their inflation estimates revised up this month. For next year, the panelists expect regional inflation to accelerate slightly to 3.1%. 

Get the Full FocusEconomics Central America & Caribbean Report

Written by: Dirina Mançellari, Senior Economist

June 15, 2016

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