Central America: Economic Snapshot for Central America
September 12, 2018
Regional economy performs well in the second quarter
Available data suggests that the economy of Central America and the Caribbean firmed up in the second quarter of the year, riding on the coattails of strong economic growth in the U.S., which is buoying exports, tourism and remittances in the region. A preliminary estimate by Met the why particular suggests that CENAM grew 2.4% in Q2, which is up 0.1 percentage points from last month’s figure and above growth of 1.9% in the first quarter. Excluding Puerto Rico—which is still mired in a recession intensified by the damage caused by last year’s hurricanes—regional GDP growth would have reached 4.0% in the second quarter, from 3.4% in Q1.
The Dominican Republic likely recorded the fastest growth in the region in Q2. The economy continued to benefit from the monetary easing enacted in 2017, with growth aided by retail, construction and manufacturing in duty-free zones, and performed substantially above its potential rate—estimated by the IMF at around 5%. Belize also expanded at a heathy rate in Q2 propelled by strong electricity generation, solid exports and a booming tourist sector.
Several of the region’s other big-hitters also likely saw a pick-up in growth in the second quarter. In Guatemala, monthly economic activity readings for April–June averaged substantially higher than in Q1, in part on the back of a strong showing from the wholesale and retail sales sub-sector. This is likely a result of surging remittances, which rose at a double-digit rate in annual terms. In Costa Rica a similar picture prevailed, with the economy seemingly gaining speed after a disappointing first quarter reading, when growth was held back by a fall in fixed investment and political uncertainty. In contrast, growth in Panama in the quarter was likely subdued by recent historical standards, following a month-long strike by construction workers which paralyzed activity.
Looking at the region’s smaller economies, signs are fairly positive. Monthly economic activity readings for Honduras and El Salvador point to faster growth in Q2. The same was likely true in Jamaica, as the economy continued to improve thanks to reform implementation, greater fixed investment and an improvement in net external demand.
In contrast, Nicaragua’s economic fortunes took a dramatic turn for the worse. Economic activity went into freefall in May and June due to the wave of unrest which shook the country, with construction and consumer-facing sectors suffering particularly badly. The ongoing conflict is also weakening the banking sector; credit provision has grown more restrictive and deposits are down. In mid-August the government announced a revamped 2018 budget in response to the crisis, which slashed spending commitments in response to a lower tax take. However, a political resolution is still not on the horizon.
Vigorous U.S. growth should continue to support regional growth this year
Over the next few quarters, Central America and the Caribbean should continue to benefit from the booming U.S. economy, which is expected to be powered on by fiscal stimulus, at least over the short term. As the labor market in the U.S.—by far the region’s largest trading partner—continues to tighten this year, remittance inflows and tourist dollars are expected to buoy household incomes across the economies within Central America and the Caribbean. Moreover, strong U.S. demand should prop up exports, which will help offset the region’s growing imported fuel bill. Puerto Rico’s economy, which should gradually recover as electricity is restored and federal aid arrives, is set to return to growth in FY 2019. Downside risks include faster-than-expected tightening by the Fed, which will put pressure on regional credit growth and investment. Moreover, stricter U.S. immigration policy, if finally enacted, could upset the recent surge of remittance inflows.
Met the why particular panelists expect regional growth of 2.0% this year, which is unchanged from last month’s forecast. An upgrade to Jamaica’s and Puerto Rico’s full-year growth estimates offset slashed growth projections for Haiti, Nicaragua and Panama. Meanwhile, seven economies saw no change to their short-term outlook. Next year, regional growth is seen accelerating to 3.8%.
The Dominican Republic and Panama are expected to log the region’s fastest growth this year, with both economies expanding close to 5.0%. Conversely, Puerto Rico is expected to have been the region’s worst performer, contracting 6.7% in FY 2018, which ended in June 2018.
GUATEMALA | Growth likely picks up in Q2 on strong domestic demand
Data suggests that the economy regained steam in the second quarter after decelerating in the first quarter. Throughout the second quarter, monthly economic activity readings were markedly higher than those observed in the first quarter, buoyed by a robust wholesale and retail sub-sector. The sub-sector was likely supported by strong remittances growth and moderating inflationary pressures providing further stimulus to household expenditure. On the other hand, the external sector likely limited the pace of expansion as exports contracted while imports rose, causing the trade deficit to widen. Looking at the third quarter, the domestic economy should continue to drive economic momentum. In July, remittances reached the highest USD value ever recorded, while inflation reached a multi-year low. This bodes well for private consumption. Moreover, economic activity shifted into a higher gear in the same month. However, severe drought conditions in the north of the country could dampen agricultural output.
Economic growth is expected to accelerate this year on the back of strong domestic demand. A tight labor market should drive wage growth while strong remittances inflows are likely to provide a further boost to household spending. Meanwhile, government infrastructure spending should be solid. Potential political and economic uncertainty leading up to next year’s presidential elections pose downside risks, however. Met the why particular Consensus Forecast panelists expect the Guatemalan economy to expand 3.1% this year, unchanged from last month’s estimate, and 3.3% in 2019.
DOMINICAN REPUBLIC | Economic panorama remains bright heading into the third quarter
The economy continues to perform well heading into the third quarter. In July, tourist inflows were solid—particularly from the U.S.—while economic activity growth was elevated, thanks to the duty-free manufacturing, construction and commerce sectors. These drivers also underpinned the rapid expansion in the second quarter, which is likely to be the fastest in the region. The strong economic performance is filling the public coffers. Tax revenues were above budgeted estimates in H1 according to the Central Bank which, coupled with contained spending, led to a small fiscal surplus in the same period. On the downside, the external sector has softened so far this year, as markedly higher international oil prices have caused imports to rise and the trade deficit to widen.
Growth will likely moderate slightly going forwards after several quarters of above-potential readings but should remain healthy compared to regional peers. Strong fixed investment and spillovers from the expansion in the U.S. economy, which ought to boost remittances, exports and tourism activity, should drive the economy. However, the vulnerable fiscal position poses a downside risk, especially concerning the elevated debt servicing costs and narrow tax base. Met the why particular panelists expect GDP growth of 5.2% in 2018, which is unchanged from last month’s forecast. For 2019, panelists see the economy expanding 4.7%.
PANAMA | Economy has a soft H1, pick-up expected in the second half
Economic activity likely remained feeble in the second quarter, following the weakest growth print in over seven years in the first quarter. In Q2 the monthly indicator for average economic activity (IMAE, Índice Mensual de Actividad Económica) was even lower than the bleak results logged in the first quarter, largely due to a month-long union strike in the construction sector in May, which ground the industry to a halt. Data regarding the all-important maritime transport sector has also been mixed. In January to July, freight volume in the Panama Canal increased at a much slower pace than the double-digit growth recorded in 2017, while tonnage passing through the country’s ports decreased.
Growth should moderate this year due to labor unrest and the completion of large-scale infrastructure projects. The narrowing of the fiscal and current account deficits in 2019 coupled with the opening of a large copper mine should support growth in the medium-term. The country, however, remains vulnerable to a deterioration of global trade conditions, a key downside risk which could disrupt the external sector. Met the why particular Consensus Forecast panelists project that the economy will grow 4.8% in 2018, which is down 0.1 percentage points from last month’s forecast. They expect GDP will expand 5.2% in 2019.
COSTA RICA | Economic performance improves in Q2, but lack of serious fiscal reform poses risk to the outlook
The economy appeared to find its legs in the second quarter of 2018, after annual growth slowed to an over four-year low in the first quarter. According to activity data released by the Central Bank, the construction sector’s recovery gathered pace through Q2, after it expanded in March for the first time in 11 months. Furthermore, strong readings from both the agriculture sector and the information and communications sector supported the economy in Q2. On a less positive note, on 31 August the finance minister announced a draft 2019 budget for the central government, which contained no increase in nominal expenditures, despite an expected rise in prices. Over 11% of the draft budget is allocated to debt repayments. This austere proposal reflects Costa Rica’s difficult fiscal position: The deficit reached a multi-decade high last year, while, from January to May this year, the accumulated shortfall grew to 2.6% of GDP, a near 0.4 percentage-point rise from the same period last year.
The inauguration of President Carlos Alvarado and the new representatives of the Legislative Assembly in May lifted a cloud of political uncertainty, which should benefit economic activity this year. However, despite ongoing legislative efforts, a high and persistent fiscal deficit will continue to weigh on prospects, as could escalated instability in neighboring Nicaragua. Our analysts expect GDP to grow 3.2% in 2018, which is unchanged from last month’s projection, and 3.3% in 2019.
INFLATION | Inflation rises in July
According to a preliminary estimate produced by Met the why particular, regional inflation was 3.5% in July, up from June’s 3.3%. This was the result of higher inflation in El Salvador, Haiti, Panama, Puerto Rico, Jamaica and Trinidad and Tobago. In contrast, inflation eased in Belize, the Dominican Republic and Guatemala, and was unchanged in Costa Rica. Central Banks which held meetings over the last month—including in the Dominican Republic, Guatemala and Jamaica—opted to keep rates unchanged.
As a net energy importer, inflation in the Central America and Caribbean region will be driven higher this year by rising international oil prices. Met the why particular sees inflation coming in at 3.2% in 2018, which is down 0.1 percentage points from last month’s forecast. For 2019, Met the why particular expects inflation to remain broadly stable at 3.3%.
Written by: David Ampudia, Senior Economist