Costa Rica: Economic Snapshot for Central America
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. Excluding Puerto Rico, CENAM is forecast to have grown 3.5%, which if confirmed would match Q3’s figure.
A sustained recovery from 2017’s devastating hurricanes in regional heavyweight Puerto Rico buoyed the region’s performance in the fourth quarter. The country’s economic activity index saw double-digit growth in October and November, linked to stronger power generation and employment.
Excluding Puerto Rico, economic growth was uneven across the region. Among the big hitters, the Dominican Republic was the star performer, with the economy surging thanks to healthy credit growth and strong expansions in construction and services.
In contrast, growth among the other key economies in the region appeared more modest, even though firm Q4 GDP readings are still outstanding. Panama should have gained some momentum from Q3, although growth was likely still soft compared to the scintillating economic performance of past years. Economic activity readings for Guatemala suggest a continued moderate expansion, with November’s figure supported by the wholesale and retail sector. Meanwhile, widespread strikes and uncertainty over fiscal reform hampering output meant Costa Rica had a downbeat fourth quarter.
In the region’s smaller economies, momentum should have been fueled by spillovers from the expansion in the U.S. fueling exports, tourism and remittance inflows. Nicaragua is a notable exception and remains mired in a deep recession due to civil unrest, which has hit the construction, retail and hotels and restaurants sectors particularly hard.
On the political front, Nayib Bukele, who ran for the Grand Alliance for National Unity (GANA) party, won the presidential elections held in El Salvador in early February. The president-elect’s policy priorities are vague, although he is thought to be more business friendly than the outgoing leader. That said, with his GANA party holding only a small number of seats in parliament, passing substantive economic reforms will be difficult. In Panama, parliament approved a bill penalizing tax evasion at the end of January. The reform should enhance the competitiveness of the country’s financial center and boost business sentiment.
Regional economy should make further progress in 2019, but downside risks lurk
In 2019, Central America and the Caribbean should continue to benefit from robust—albeit moderating—momentum in the U.S., the region’s key trading partner, which should underpin remittance inflows, tourism activity and exports. Moreover, the recovery of the Puerto Rican economy should continue as rebuilding efforts accelerate, the recession in Nicaragua should moderate slightly, and Panama is set to regain its robust growth trajectory following a blip in 2018, thanks to a new mining project and infrastructure development.
Uncertainty over immigration policy in the United States—particularly the temporary protected status of many Central Americans currently residing there—global trade tensions and volatile oil prices are the key external risks. Internally, key risks include a further deterioration of the political situation in Nicaragua, potential political uncertainty in Guatemala in the run-up to elections this year and vulnerability to extreme weather events.
FocusEconomics panelists expect regional growth of 3.6% this year, which is unchanged from last month’s forecast. Costa Rica, Haiti, Nicaragua and Trinidad and Tobago had their 2019 growth forecasts downgraded this month, while the Dominican Republic had its forecast upgraded. The region’s remaining economies saw their 2019 projections unchanged. Our panelists see regional growth at 3.3% in 2020.
The Dominican Republic and Panama are expected to log the region’s fastest growth this year, with both economies forecast to expand by 5.0% or more. Conversely, Nicaragua is expected to be the region’s laggard with a 1.8% contraction, as the fragile political situation continues to weigh on the economy.
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GUATEMALA | Economic growth continues at a steady pace in Q4
The economy is expected to have grown at a broadly steady pace in the fourth quarter of last year. The index of economic activity averaged only slightly below the reading from the third quarter in October and November. Meanwhile, data suggests that domestic demand should have remained robust in the fourth quarter with inflationary pressures moderating and remittances continuing to grow at a solid, albeit slightly softer, pace compared to the third quarter. On the other hand, the external sector likely remained the weak spot in the final quarter of last year. Exports contracted in November over the same month a year prior while import growth accelerated, and the trade deficit consequently widened. This follows a third quarter during which the merchandise trade deficit grew larger and the current account surplus narrowed. On the political front, the government’s continued conflict with the UN’s anticorruption body and its attempt to expel commissioners could have a negative effect on long-term economic growth by affecting foreign aid inflows.
Robust domestic demand, thanks in part to a pick-up in government spending ahead of the presidential election in June, is expected to drive economic growth this year. Private consumption is likely to benefit from a tight labor market and resilient remittance inflows due to still-healthy economic growth in the United States. However, uncertain U.S. immigration policy could affect remittances if it becomes stricter while domestic political risk might rise in the lead-up to the election, which could dent consumer and investor confidence. FocusEconomics Consensus Forecast panelists expect the Guatemalan economy to expand 3.1% in 2019, which is unchanged from last month’s forecast, and 3.0% in 2020.
DOMINICAN REPUBLIC | Economy ends 2018 with a bang
Economic momentum likely remains robust so far in 2019, although hard data is still limited. Muted price pressures and healthy private-sector credit growth—which clocked roughly 11% in January according to the Central Bank—should be supporting private consumption. This comes after the economy surged in Q4 2018 thanks to the construction and services sectors, with construction supported by projects in the private residential housing, tourism and energy sectors. In 2018 as a whole, the economy was the star performer in the CENAM region, benefiting from a solid labor market and the expansion in the U.S., which fueled exports, remittances and tourism revenue.
Growth should ebb this year due to a tough base effect and a slower expansion in the United States. However, strong fixed investment and private consumption should support the economy, which will continue to grow significantly faster than the regional average. Downside risks are primarily external, and the economy is vulnerable to higher oil prices and a faster-than-expected global economic slowdown. Moreover, the country is exposed to extreme weather events. FocusEconomics panelists expect GDP growth of 5.1% in 2019, which is up 0.1 percentage points from last month’s forecast. For 2020, panelists see the economy expanding 4.6%.
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PANAMA | Economic activity gradually improving; government approves tax evasion bill
After rebounding in Q3 2018 following three quarters of consecutively slower growth, the economy appears to have continued to regain steam in the last quarter of the year. However, growth was likely still weaker than the country’s long-term average, as indicated by modest economic activity readings in October and November. The construction sector, which performed reasonably well in Q3 after slumping in the previous quarter, should have supported the expansion in Q4, powered by the government’s ongoing infrastructure development. On the political front, in late January parliament approved a law penalizing tax evasion. The move is aimed at avoiding being blacklisted as a tax haven, and should boost the country’s status as a regional financial center as well as business sentiment
The economy is set to regain momentum this year on the back of the ramp-up in production at the Cobre Panama mine and strong infrastructure spending, as set out in the 2019 budget. A global growth slowdown and trade protectionism are the main downside risks, as they would weigh on the country’s crucial shipping and trade sectors. FocusEconomics Consensus Forecast panelists project that the economy will grow 5.0% in 2019, which is unchanged from last month’s forecast, and 4.7% in 2020.
COSTA RICA | Recent data shows 2018 was a year to forget
Economic growth slowed to a five-year low in 2018, according to preliminary data released in January by the Central Bank, due to weak consumption growth and sluggish fixed investment. Although GDP data for the fourth quarter will only be released on 29 March, the Central Bank’s monthly economic activity index has already shown a sharp growth slowdown in Q4. This was likely the consequence of widespread protests against new fiscal reform measures, which notably include the replacement of the old general sales tax with a VAT and compelled thousands of Costa Ricans to take to the streets between early-September and mid-December. The mining and quarrying; agriculture, forestry and fishing; and education and healthcare sectors were all particularly downbeat in Q4. Against this backdrop, the unemployment rate rose to a multi-year high in the quarter. More positively, the fiscal deficit narrowed slightly in 2018 compared to 2017.
Stronger fixed investment growth on the back of a more certain and sustainable fiscal outlook, coupled with solid export growth linked to a weaker colón and robust U.S. demand, should lead to an uptick in economic growth this year. That being said, fiscal austerity and tighter monetary conditions, compounded by ongoing instability in neighboring Nicaragua, could limit growth prospects. FocusEconomics Consensus Forecast panelists expect GDP to grow 2.8% in 2019, which is down 0.1 percentage points from last month’s forecast, and 3.0% in 2020.
INFLATION | Inflation falls in December, ticks up slightly in January according to preliminary data
According to an estimate produced by FocusEconomics, regional inflation was 2.3% in December, down from November’s 3.2% and marking the second consecutive monthly decline. Price pressures eased in virtually all countries, on the back of a steep decline in oil prices. A preliminary estimate for January puts regional inflation at 2.4%, largely due to a significant uptick in Guatemala. All central banks which held policy meetings over the last month left rates unchanged.
Currency weakening and solid domestic demand will drive inflation in the Central America and Caribbean region this year. The future evolution of oil prices, which were highly volatile last year, is a key source of uncertainty to the region’s inflation outlook given its reliance on imported oil. FocusEconomics panelists see inflation coming in at 3.1% in 2019, down 0.1 percentage points from last month’s forecast. For 2020, FocusEconomics panelists expect inflation to remain broadly stable at 3.0%.
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Oliver Reynolds
Economist