Central America Economic Outlook October 2016

Economy strengthens in Q2, healthy growth likely for Q3

Central America: Economy strengthens in Q2, healthy growth likely for Q3

October 13, 2016

More complete GDP data show that the economy of the Central American and the Caribbean region accelerated notably in Q2 over the previous quarter’s increase. GDP expanded 2.9% on an annual basis, which was up from the 2.3% increase recorded in Q1. The improvement in Q2 was broad-based with nearly all countries recording accelerations. Costa Rica was the only country in which GDP growth decelerated in Q2. Taking a closer look at the region’s key players,the Dominican Republic—the region’s biggest economy—expanded at the fastest rate in six years in Q2 amid improvements in the agricultural and the mining and quarrying sectors. Growth in Guatemala accelerated on the back of strong fixed investment. Panama’s economy remained robust, highlighting that the Panama Papers scandal in April had a limited economic impact. A preliminary estimate produced by FocusEconomics shows that GDP growth in Q3 likely inched down to 2.8%.

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

Some of the governments in the region presented their draft budgets for 2017 this month. No major changes were introduced in terms of the countries’ fiscal balances with respect to their budgets for this year. In the Dominican Republic, the government aims to increase spending for education, public health, public safety and social policy programs without weighing on public finances thanks to higher expected government revenues. Elsewhere in the region, against the backdrop of a worsening debt crisis in Puerto Rico, the newly-appointed control board asked Governor Alejandro García Padilla to submit a draft plan that puts the island’s finances on a sustainable fiscal path. The control board was established to supervise the restructuring of Puerto Rico’s debt and oversee negotiations with creditors. 

2016 GDP forecast stable for the fifth consecutive month  

The region’s economic growth is expected to slow down slightly compared to last year’s increase. In October, the GDP growth forecast  was steady for the fifth consecutive month. Our analysts expect the region’s economy to expand 3.0% with stable GDP growth prospects for seven of the twelve countries surveyed, including the Dominican Republic and Guatemala. Growth prospects were revised down for three countries, while Belize and Costa Rica were the only two countries for which this year’s GDP growth estimates where revised up. The regional projection for 2017 was also unchanged at the previous month’s 3.2% increase.

The Dominican Republic will be the fastest growing economy this year with a growth rate of 5.8%. On the other hand, the economies of Trinidad and Tobago and Puerto Rico are expected to be the worst performers with contractions of 2.0% and 1.4%, respectively. 

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COSTA RICA | Private consumption will support growth this year 

Costa Rica’s economy expanded at another robust rate in Q2 despite decelerating. GDP growth was 4.1% in Q2, compared to the previous quarter’s 4.5% increase. The healthy reading was mainly driven by solid private consumption and robust public spending, which more than offset the poorer performance of the external sector and an almost flat reading for fixed investment. In the third quarter, July’s economic activity slowed down slightly from June’s over-four-year high, but it still expanded at a very fast pace. The economy is performing reasonably well despite the longstanding weakness of the government. A recent survey published by Consulta Mitofsky—a Mexican consulting firm—sees Costa Rica’s President Luis Guillermo Solís as the least popular president of the entire American continent, with only a 10% approval rate.

Strong household consumption will continue to support Costa Rica’s economic growth, though this will also be constrained by a feeble external sector and weak public finances. Analysts surveyed by FocusEconomics expect the economy to expand 3.9% in 2016, which is up 0.1 percentage points from last month’s projection. For 2017, the panel also expects GDP growth will be stable at 3.9%.

DOMINICAN REPUBLIC | High-frequency data point to deceleration in Q3

The Dominican Republic’s economy grew a solid 8.7% in Q2 2016 in annual terms, gaining steam over Q1’s 6.1% growth, according to detailed data from the Central Bank. Q2’s acceleration was the result of stronger broad-based growth in all sectors of the economy. Economic activity seems to have moderated in Q3, according to high-frequency data. The indicator for economic activity increased slightly in August from July’s reading, but it nonetheless remained well below the levels seen in Q2. On the upside, in August, growth in tourist arrivals remained healthy in annual terms, even if it decelerated from the previous month. On the political front, on 28 September, the government of President Danilo Medina approved the 2017 draft budget. The draft includes additional funding for education, public health, and public safety and social policy programs.

The economy will decelerate this year but will nevertheless maintain a healthy pace of growth, supported by resilient domestic demand, a buoyant tourism sector and the partial lifting of the ban on imports by the Haitian government. Analysts expect the economy to expand 5.8% in 2016, which is unchanged from last month’s projection. For 2017, the panel projects GDP to increase 5.0%. 

GUATEMALA | Economy likely accelerated again in Q3 

Guatemala’s economy accelerated in the second quarter of the year, following the sharp slowdown in the first quarter. GDP grew 3.4% in Q2, thanks to a less negative contribution from the external sector. Data for the third quarter suggest more of the same: the Central Bank’s economic activity indicator shows the economy picked up in August and growth in remittances is robust. Nonetheless, analysts suggest that the authorities’ 2017 draft budget presentation in September reflected an overly optimistic outlook for revenues. Meanwhile, the strong anti-corruption drive led by President Jimmy Morales with the help of a UN taskforce is losing steam. Members from both the President’s and the Vice-President’s families are being investigated in separate corruption cases but the former President of the Central Bank was only sentenced to a suspended jail-term. He was one of the most high profile cases in the country’s anti-corruption purge.

The Guatemalan economy is expected to grow robustly this year, on the back of political normalization and continued remittances growth. However, heightened political uncertainty and slower growth in the U.S. continue to pose risks to the outlook. FocusEconomics Consensus Forecast panelists forecast that GDP will rise 3.6% this year, which is unchanged from last month's projection. Next year, the panel expects GDP growth remaining unchanged at 3.6%.

PANAMA | Strong public investment fuels growth in 2016  

Supported by expansions in construction, public utilities and services, GDP growth accelerated from a two-year low of 4.6% in Q1 to a stronger 5.2% in Q2. The reading suggests that the short-term economic impact of the Panama Papers has been limited. The acceleration, however, masks worrisome aspects of the economy that point to an ongoing deceleration. In the first seven months of this year, Panama Canal earnings dropped 4.3% and cargo movements in Panamanian ports contracted at a double-digit rate. Economic activity expanded at the slowest rate in seven months in July despite including the earnings from the expanded Panama Canal for the first time.

Strong public investment and diversified services will continue to fuel growth this year. However, flagging global trade and ongoing weakness in the maritime industry could put a damper on the outlook. Analysts expect the economy to expand 5.7% in 2016, which is unchanged from last month’s projection. For 2017, the panel forecasts growth of 5.9%.

INFLATION | Inflation eases further in August    

Inflation in the region eased again in August and hit an eight-month low. Inflation was 2.6%, which was down from the previous month’s 2.7%. The majority of countries in the region tallied lower inflation readings in August, with BelizeCosta Rica and the Dominican Republic recoding the biggest decreases. Conversely, inflation increased in four countries, including Guatemala and Panama. Looking forward, inflationary pressures are expected to remain broadly stable this year. A preliminary estimate for September produced by FocusEconomics shows that regional inflation likely inched down slightly to 2.5%.

Our October Consensus Forecast estimates inflation of 2.5% this year, which is unchanged from last month’s forecast. Inflation forecasts were unchanged for BelizeNicaragua and Puerto Rico. Conversely, projections were downgraded for five economies, including the Dominican Republicand El Salvador. Projections for the other four economies were revised up. For next year, our panelists expect regional inflation to accelerate to 3.2%. 

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Written by: Dirina Mançellari, Senior Economist

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