Central America Economic Outlook September 2016

Economy accelerates in Q2 on improvements in region's key players

Central America: Economy accelerates in Q2 on improvements in region's key players

September 14, 2016

Recent data show that the economy of the Central American and the Caribbean region gained traction in the second quarter of this year, improving notably over the deceleration recorded in the first quarter. GDP expanded 3.5% over the same quarter of last year, according to a preliminary estimate. The figure marked the fastest increase in over a year and was an improvement over the 2.7% expansion in Q1.

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Taking a closer look at the region’s key players, in the second quarter, positive developments were recorded in the Dominican Republic, where GDP recorded the fastest expansion in six years, according to a flash estimate. The economy was supported in H1 by a healthy performance in the agricultural and the mining and quarrying sectors. Moreover, according to the Central Bank, the country’s financial sector was robust and showed adequate indicators of capital sufficiency and high liquidity in the first half of the year. Conversely, the services sector faltered due to weaker growth in the retail sales and transportation sub-sectors. Meanwhile,Jamaica’s economy accelerated in the second quarter and grew at the fastest rate in three quarters, indicating that the Extended Fund Facility program agreed with the IMF is bearing fruit. The country is expected to receive its next loan tranche as soon as this month. Elsewhere in the region, improvements in the second quarter were also recorded in the economies of Guatemala and Costa Rica due to strong domestic demand.

2016 GDP forecast remains stable in September 

The region’s economy is expected to decelerate slightly this year over last year’s growth even though an improvement in remittances and tourism will support economic activity. In September, the GDP growth outlook for Central America and the Caribbean was left unchanged for the fourth consecutive month. Our panel expects the region’s economy to expand 3.0% this year. The economic outlook was left unchanged for 5 of the 12 economies surveyed, including Costa Rica and Puerto Rico. On the other hand, growth prospects were revised up for five economies including the Dominican Republic and Guatemala. Panama and Trinidad and Tobago were the only countries for which this year’s growth forecasts were downgraded. The regional projection for 2017 was revised slightly up with GDP expected to increase 3.2%.

The Dominican Republic will be the fastest growing economy in the region followed by Panama, with growth rates of 5.8% and 5.7%, respectively. On the other hand, Trinidad and Tobago’s economy will be the worst performer and its economy is expected to contract 2.0%, followed by Puerto Rico with a contraction rate of 1.3%. 

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COSTA RICA | Strong domestic demand will prop up growth this year

Costa Rica’s economy likely expanded at another robust rate in Q2, due to the high growth rates of economic activity recorded in all three months of the quarter. The likely expansion in the whole quarter was mainly driven by strong improvements in the financial sector, although the agricultural sector picked up and grew at the fastest rate in a year in May. In July, the economy slowed down a notch from June’s over-four-year high, but it still grew at almost full steam. On a positive note, Costa Rica’s economic expansion has mostly been sustained by clean energy production: recently, the Costa Rican Institute of Electricity (ICE) announced that in the three months up until the end of August, all the electricity consumed in the country had come from renewable sources.

Costa Rica’s fiscal consolidation will continue to weigh on growth until revenue collection measures are implemented. However, the upturn of the agriculture and manufacturing sectors, coupled with higher domestic demand and low costs of energy, will prop up economic growth this year. Analysts surveyed by FocusEconomics expect the economy to expand 3.8% in 2016, which is unchanged from last month’s projection. For 2017, the panel expects GDP growth to remain stable at 3.8%.

DOMINICAN REPUBLIC | Economy accelerates in Q2 due to strong performance in agricultural sector

The economy grew a strong 8.7% in Q2 2016 in annual terms, accelerating over Q1’s 6.1% growth. Data for H1 2016 show that the economy grew 7.4% over the same period last year, mainly on the back of the strong performance recorded in the agricultural, mining and quarrying and local manufacturing sectors. On the downside, growth decelerated slightly in the construction and service sectors, and manufacturing in the free economic zones swung from growth in H1 2015 to a mild drop in H1 2016. The economic momentum seems to have carried over into Q3: in July, growth in tourist arrivals accelerated over the previous month and tourist arrivals hit a historical high. On the political front, on 16 August, Danilo Medina, who was sworn in as President for his second and last four-year term, announced that his government will increase teachers’ salaries by an average of 60% and that his political action will be focused on job creation.

The economy is foreseen decelerating this year although the pace of growth will be one of the fastest in the region, supported by strong domestic demand and a buoyant tourism sector. Analysts expect the economy to expand 5.8% in 2016, which is up 0.2 percentage points from last month’s projection. For 2017, the panel projects GDP to increase 4.7%. 

GUATEMALA | Growth prospects remain robust amid stabilizing political environment 

Guatemala’s economy is expected to slow somewhat this year partly as a result of the political turmoil, after having achieved robust growth in 2015. In August, the IMF completed its Article IV consultation with Guatemala, commending the new administration for its willingness to tackle the widespread corruption which is choking growth: for example, losses due to contraband and corruption in the customs administration are estimated to amount to around one fifth of the central government’s total budget. The Fund also highlighted the positive contribution to growth from private consumption, aided by low oil prices and strong remittances growth. However, the IMF underlined the need for further reforms to strengthen the fiscal framework. Better tax collection would help the government meet its Millennium Development Goals commitments, on which it is lagging. On monetary policy, the Central Bank was strongly encouraged to transition towards full-fledged inflation targeting.

The stabilizing political environment and strong remittances growth, combined with the strong dollar, should keep the Guatemalan economy on track for another solid year. FocusEconomics panelists see the economy expanding 3.6% this year, which is up 0.1 percentage points from last month's forecast. Next year, the panel expects the economy remaining stable at 3.6%.

PANAMA | Economy gains momentum in second quarter  

The Panamanian economy is likely to have performed well in the second quarter of the year. In June, the Statistical Institute’s economic activity index expanded 4.2%, which was down from May’s figure but still rounded off a solid quarter of growth. Robust expansions have been broad-based, with infrastructure investment and tourism performing particularly well. In other news, in September, the fallout from the Panama Papers scandal continued to reverberate: Parliament passed a law that will make it easier to impose retaliatory trade measures on countries that levy restrictive trade measures against it. The new law was voted as Panama and Colombia continue to work on resolving their ongoing trade dispute, with Panama protesting against Colombia’s tariff hike on certain textile imports.

Strong public investment and diversified services will continue to fuel growth this year. However, weak global trade dynamics risk dampening the outlook. Analysts expect the economy to expand 5.7% in 2016, which is down 0.1 percentage points from last month’s projection. For 2017, the panel forecasts growth of 5.9%.

INFLATION | Inflation stabilizes in July  

Inflation in the Central American and the Caribbean region was stable at the previous month’s 2.8% in July. Guatemala and Nicaragua recorded higher inflation in July, which was offset by lower inflation in Honduras and Jamaica. Looking forward, inflationary pressures are expected to remain broadly stable this year. A preliminary estimate for August produced by FocusEconomics shows that regional inflation likely inched down slightly to 2.7%.

Our September Consensus Forecast projects inflation of 2.5% this year, which is unchanged from last month’s forecast. Inflation forecasts are unchanged for 3 of the 12 countries in our survey, including the estimates for El Salvador and Puerto Rico. Conversely, projections were upgraded for seven economies including Guatemala and Jamaica. Nicaragua and Panama were the only countries for which inflation forecasts were downgraded. For next year, our panelists expect regional inflation to accelerate to 3.1%. 

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Written by: Dirina Mançellari, Senior Economist

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