Central America Economic Outlook January 2018

Economic Snapshot for Central America

Central America: Economic Snapshot for Central America

January 17, 2018

Complete GDP data shows region’s economy accelerated marginally in Q3

The economic performance of the Central American and Caribbean region was weaker than previously estimated, with weather-related events severely disrupting activity in the Dominican Republic and Puerto Rico and fiscal woes staving off investment in Costa Rica. A more comprehensive set of data shows that the region’s economy expanded 2.3% in Q3 over the same period of the previous year, a marginal improvement compared to the six-and-a-half-year low of 2.2% growth logged in Q2 but below the 2.7% expansion initially expected.

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

The downward revision was largely the result of softer-than-expected growth in the Dominican Republic, where the hurricanes that struck the northeast of the country in September hampered economic activity more than had been expected. The economy expanded 3.0% for a second consecutive quarter in Q3, with domestic dynamics nonetheless improving on account of the Central Bank’s accommodative stance and the government’s secondary budget aimed at shoring up construction activity. The Costa Rican economy also accounted for much of the region’s soft growth in Q3. GDP growth decelerated to an over two-year low of 2.9% in Q3 from 4.2% in Q2, with higher interest rates and ongoing fiscal concerns tempering investors’ appetite for Costa Rican assets.

In Panama, the economy roared through Q3 as freight through the Panama Canal continued to expand solidly, supporting activity across domestic trade-dependent sectors. GDP growth came in at 5.4% in Q3, slightly above the 5.2% increase recorded in Q2. Economic activity also picked up in Guatemala to a 2.7% increase in Q3 from a 2.3% rise in Q2, with heavy remittance inflows from the U.S. and a turnaround in the external sector buttressing economic activity. In Honduras, growth hit a decade high of 6.5% in Q3 due to double-digit growth in exports, while activity in El Salvador’s economy accelerated for a second consecutive quarter on the back of robust remittances and solid global growth. The Jamaican economy also returned to growth in Q3 following a small decline in Q2, with manufacturing and tourism-related services driving the recovery.

While economic figures improved in most of the region’s economies in Q3, political events present risks to growth. In Honduras, the elections’ commission declared incumbent Juan Orlando Hernandez President-elect following elections that have been deemed fraudulent by the opposition and international observers. The commission’s move is backed by the United States but is at odds with calls from the Organization of American States (OAS) to hold new elections. It is highly likely that the dispute will derail the economy’s robust performance, staving off investment and causing sentiment to sink. El Salvador received bad news when the U.S. government announced the termination of the Temporary Protected Status program for nearly 200,000 Salvadorans who currently benefit from work authorization. The program will cease to be effective from September 2019 and threatens remittances inflows into El Salvador from citizens living in the U.S., an important contributor to the country’s economy.

In Costa Rica, voters will head to the polls on 4 February to choose both a new president and the makeup of the Legislative Assembly. The presidential favorites occupy political ground that broadly leans to the right, while widespread undecidedness among voters nearly guarantees that a second round of elections will be held on 1 April. The new president will have to take the lead on improving the country’s poor fiscal metrics, but any meaningful reform will prove daunting since parliament is broadly expected to be fragmented following the vote.

Get the Full FocusEconomics Central America & Caribbean Report  

Solid global trade growth to buttress economy this year despite fiscal concerns

Persistent political noise and fiscal imbalances will continue to hamper the region’s economic performance this year. The economies of Costa Rica, El Salvador and Puerto Rico are facing massive debt repayment obligations and dire fiscal outlooks. Fiscal woes aside, the regional economy will accelerate from last year in 2018 on the back of robust global growth and healthy remittance inflows. FocusEconomics panelists expect growth to come in at 3.0% this year, which is unchanged from last month’s estimate. In 2019, the Consensus Forecast projects an acceleration to 3.3% growth.

Stable prospects in the region are reflective of unchanged GDP projections for 7 of the 12 economies in the region. Growth forecasts were downgraded for the Dominican Republic, Jamaica and Trinidad and Tobago, while the economies of El Salvador and Nicaragua are now expected to grow at a faster clip than foreseen in last month’s report.

The Panamanian economy is set to be the best performer in the region this year, with an expansion of 5.5%. Growth will continue to benefit from robust trade flows through the Panama Canal and the spillover effects of healthy trade volumes will have on domestic sectors. The economies of the Dominican Republic and Nicaragua are each expected to expand at a robust pace of 4.5% this year. Conversely, Puerto Rico’s economy is expected to continue to be the region’s laggard and contract 1.8% in FY 2018, which ends in June 2018.

GUATEMALA | Economy stages moderate rebound in Q3

Record-high remittances and a turnaround in the external sector drove an acceleration in annual GDP growth in Q3, contrasting Q2’s tepid seven-year low. Despite ticking down to a four-year low, household spending—bolstered by last year’s record-breaking pace of transfers from the United States and healthy agricultural output—nonetheless underpinned domestic demand in the quarter, offsetting a fall in government spending and slower growth in fixed investment. On the external side, exports of goods and services grew on stronger volumes of key export crops, while lower imports of fuel and raw materials led to a rebound of the sector’s contribution to overall GDP growth. Moreover, leading data suggests that similar trends could have propelled growth in Q4; remittance inflows capped a stellar year with solid transfers in December, while the modest depreciation of the quetzal since September bodes well for exports.

Stronger household spending is expected to drive GDP growth this year as the improving U.S. labor market translates into heavier remittances from workers abroad. Government spending in education and infrastructure is also expected to tick up, despite the lack of an approved budget. Major downside risks include continued political scandal and its further bruising of economic activity, as well as possible disruptive changes in U.S. trade and immigration policies. FocusEconomics panelists forecast that GDP will grow 3.3% in 2018 and 3.5% in 2019.

DOMINICAN REPUBLIC | Economic activity disrupted in Q3 by Hurricanes Maria and Irma

The economy recorded a lackluster performance in the third quarter, with annual GDP growth clocking in at 3.0% for a second consecutive quarter on the back of hurricane-induced disruptions in September. It has made significant headway since, however, with the Central Bank facilitating credit growth and the government allocating additional budgetary resources to shore up ailing activity in the construction sector. These measures are now bearing fruit. Economic activity expanded on an annual basis at the fastest clip in nearly a year in November. Meanwhile, new rules approved by congress in late December will bring domestic financial operations in the country up to international standards. This is expected to attract foreign investors who had previously shied away from the market due to a perceived lack of transparency, which will help push down borrowing costs for the government and improve the Dominican Republic’s credit profile.

Economic growth will benefit this year from an accommodative monetary stance and increased government support. Household spending will be buttressed by robust remittance inflows and cheaper credit, while the external sector is expected to record another strong performance on the back of robust global growth and a weaker peso. FocusEconomics panelists expect GDP growth of 4.5% in 2018, which is down 0.1 percentage points from last month’s forecast. For 2019, panelists also see the economy expanding 4.5%. 

PANAMA | Panama Canal freight buttresses economic growth in Q3

The economy grew 5.4% annually in the third quarter, coming in slightly above the preceding quarter’s 5.2% increase. The acceleration in Q3 was driven by a broad-based expansion, namely faster growth in financial intermediation along with solid growth in construction; mining and quarrying; and transportation, warehousing and communication, all of which expanded at a double-digit pace but decelerated slightly from Q2. Growth is expected to have remained buoyant in the final quarter of the year, as cargo movements in Panamanian ports expanded 9.9% in annual terms in November, and fiscal transfers from the Panama Canal to the central government reached a record high USD 1.7 billion in 2017. This figure is expected to increase further in 2018, as the Panama Canal Authority is planning on increasing the number of daily transits allowed in the expanded Panama Canal to boost earnings.    

Panama’s economy is set to grow at a steady pace this year and next on the back of growth in construction, maritime trade and Panama Canal earnings. Likewise, the establishment of diplomatic relationships with China late last year could also fuel faster investment growth. FocusEconomics Consensus Forecast panelists project that the economy will grow 5.5% in 2018, which is unchanged from last month’s forecast. The panel expects GDP to expand 5.4% in 2019. 

COSTA RICA | Presidential vote in early February likely to be followed by second round

The economy slowed in the third quarter of last year due to lower fixed investment. According to the Central Bank, economic growth weakened to 2.9% in Q3 compared to a year earlier from 4.2% in Q2. While consumption dynamics pointed to resilience in the economy, fixed investment fell amid higher interest rates and uncertainty generated by the government’s fiscal difficulties. The external sector continued to contribute to growth in Q3, albeit by slightly less than in Q2. Recent months suggest more resilience in the economy: In November, exports grew at a healthy year-on-year rate, while economic activity picked up compared to the same month in 2016 due to a stronger manufacturing sector. On 4 February, the electorate will vote in the first round of what is expected to be a two-round presidential election; it will also decide on the make-up of the Legislative Assembly. With public debt rising in Costa Rica, these elections will have an important bearing on the country’s chances of badly-needed fiscal policy reform.

With key export markets such as the U.S. expected to perform strongly this year, the external sector should continue to support the economy. However, the government’s fiscal difficulties, including high debt levels and persistently high fiscal deficits, weigh on the outlook. The FocusEconomics Consensus Forecast panel sees GDP expanding 3.7% in 2018, which is unchanged from last month’s projection. In 2019, the panel foresees another 3.7% expansion. 

INFLATION | Inflation accelerates further in December 

Regional inflation accelerated to 4.4% in December from 4.1% in November, marking the highest figure since December 2014. Inflationary pressures are strengthening across most of the region due to higher global commodity prices. In December, inflation accelerated in Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Jamaica, Nicaragua and Panama.

Accelerating regional economic growth and higher oil and food prices are expected to support inflation in 2018, causing it to rise to 3.5%, which is up 0.1 percentage points from last month’s estimate. In 2019, Consensus Forecast panelists expect inflation to inch up to 3.6%. 

Written by: David Ampudia, Senior Economist


Sample Report

Looking for forecasts related to in Central America? Download a sample report now.


Central America Economic News

  • Central America: Economic Snapshot for Central America

    February 13, 2019

    Regional economy likely performed well in Q4 FocusEconomics Consensus Forecast panelists expect the Central America and the Caribbean region to have expanded 4.0% in the fourth quarter, up from Q3’s 3.2% increase.

    Read more

  • Central America: Economic Snapshot for Central America

    January 16, 2019

    Regional economy picked up speed in Q3; further acceleration likely in Q4 According to a comprehensive estimate, the economy of Central America and the Caribbean expanded 3.2% in the third quarter, up from Q2’s 3.0% growth but down from the preliminary estimate of 3.3%. The downward revision was largely due to a weaker-than-expected outturn in Costa Rica, due to softer private consumption growth on higher unemployment and limp consumer confidence, and widespread strikes over the government’s fiscal reform bill.

    Read more

  • Central America: Economic Snapshot for Central America

    December 6, 2018

    Regional economy likely gained momentum in Q3 According to a preliminary estimate, the economy of Central America and the Caribbean should have expanded 3.3% in the third quarter, which—if confirmed—would mark an acceleration from the second quarter’s 2.2% but would be below last month’s estimate of 3.4% growth.

    Read more

  • Central America: Economic Snapshot for Central America

    November 5, 2018

    Regional economy likely gained steam in Q3 According to a preliminary estimate, the economy of Central America and the Caribbean should have expanded 3.4% in the third quarter, which, if confirmed, would mark an acceleration from Q2’s 2.2%.

    Read more

  • Central America: Economic Snapshot for Central America - October

    October 7, 2018

    Regional economy gains steam in the second quarter A comprehensive set of data shows that the economy of Central America and the Caribbean strengthened in the second quarter of the year, with growth rising to 2.2% from 2.0% in Q1.

    Read more

More news

Search form