Central America Economic Forecast

Economic Snapshot for Central America

April 11, 2019

Risks to the Central America & Caribbean outlook skewed to the downside

In 2019, Central America and the Caribbean should continue to benefit from strong remittance inflows, tourism activity and exports. Risks appear skewed to the downside and stem largely from the U.S.-China trade dispute, uncertainty over U.S. immigration policy, vulnerability to extreme weather events and the possibility of spillovers from the political crisis in Nicaragua.

Central America and the Caribbean is projected to grow 3.5% in 2019, down 0.1 percentage points from last month's forecast. For 2020, Central America is expected to grow 3.3%.

Guatemala Economic Outlook

The economy slowed slightly in the final quarter of last year as domestic demand softened, while the external sector continued to detract from growth. Growth in remittances edged down in the quarter and likely affected household expenditure, which stumbled in Q4. Looking at Q1 2019, available data suggests a continued loss of momentum. Growth in economic activity in January–February averaged noticeably below the Q4 reading, indicating softer annual growth in the economy. This is likely linked to a marked pick-up in inflation in the first two months of the quarter and a substantial moderation in the annual growth rate of remittances in Q1 compared to the prior quarter. On the external front, merchandise exports continued to drop in February, while imports grew robustly, indicating the trade sector will have likely detracted from growth again in Q1.

Domestic demand should buttress the economy this year, driven by stronger fixed investment and public expenditure. However, uncertainty over U.S. immigration laws and President Trump’s threat to halt development aid cloud the outlook, while rising domestic political risk prior to June’s presidential election could dent consumer and investor confidence.

Met the why particular 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.

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Dominican Republic Economic Outlook

The economy has begun the year in impressive fashion. Economic activity growth was robust in January and February, supported by a dynamic construction sector and ample credit provision. Moreover, tourist arrivals grew strongly in the same period, driven in part by strong labor market conditions in the U.S. In addition, remittances were healthy in January and February, which, coupled with muted price pressures, should have stoked private consumption. In a recent staff visit, the IMF praised the strong growth momentum and recent monetary and financial market reforms. However, the Fund encouraged the government to strengthen the fiscal position and the electricity sector, which remains a drag on the economy in the absence of the signing of the electricity pact. In March, the government announced a plan to cut red tape, which should boost economic competitiveness.

Growth will ebb this year due to a tough base effect and easing momentum in the U.S. However, the expansion should still be notably above the regional average, underpinned by strong credit supply and a healthy labor market. Downside risks stem from a fragile fiscal position, volatile oil prices and a possible faster-than-expected economic slowdown in the U.S.

Met the why particular panelists expect GDP growth of 5.2% in 2019, which is down 0.1 percentage points from last month’s forecast. For 2020, panelists see the economy expanding 4.6%.

Panama Economic Outlook

Data available so far for Q1 2019 paints a mixed picture, with growth likely picking up from Q4 but remaining under the average of past years. The monthly economic activity indicator for January showed modest growth, with a solid showing from the energy and tourism-related sectors. Activity in the critical shipping sector appeared more subdued in January, according to Panama Canal and national ports data, but picked up significantly in February. Turning to the Cobre Panama copper mine, a bill recently presented to parliament should clear lingering legal issues and pave the way for a USD 327 million expansion project this year. The mine started operating in February and will begin exporting in June. In the political arena, the 5 May general election could see the opposition party, the PRD, take power on a pro-business platform focused on combating corruption and boosting economic competitiveness.

Growth is set to regain momentum this year on the back of rapidly rising output at the Cobre Panama mine, higher private spending, and public infrastructure investment projects. Lower global growth and trade protectionism remain the main downside risks to the country’s outlook; however, progress on a U.S.-China trade deal could lift growth prospects.

Met the why particular Consensus Forecast panelists project that the economy will grow 4.9% in 2019, which is down 0.1 percentage points from last month’s forecast, and 4.8% in 2020.

Costa Rica Economic Outlook

The economy grew at the slowest pace in nearly six years in the fourth quarter of 2018 as large public protests related to fiscal policy reform ate into economic activity. Private consumption growth slowed and was likely hampered by a large increase in unemployment, a weak increase in private sector loans and downbeat consumer confidence. Moreover, fixed investment also increased at a slower pace and the cash-strapped government slashed spending, while export growth remained strong despite moderating in the quarter. Turning to this year, higher consumer confidence in the first quarter bodes well for private spending, although consumers remained overwhelmingly pessimistic. In addition, although economic activity growth in January was weak, it did not change from December, putting an end to eight consecutive months of slowing growth.

This year, stronger fixed investment growth on the back of a more certain fiscal outlook should lead to an uptick in economic growth. Moreover, solid export growth linked to a weaker colón and February’s opening of a large industrial port in Limón should add to economic momentum. Ongoing instability in neighboring Nicaragua, however, could weigh on exports.

Met the why particular Consensus Forecast panelists expect GDP to grow 2.8% in 2019, which is unchanged from last month’s forecast, and 2.9% in 2020.

Central America Monetary & Financial Sector News

Regional inflation rose from 1.6% in January to 1.8% in February amid an uptick in global oil prices. Inflation should rise further later this year, as the impact from the late-2018 oil price shock fades and economic momentum stays solid, but will remain moderate nonetheless.  

In recent weeks, the central banks of Costa Rica and Jamaica cut rates amid low inflation. Looking ahead, on the whole regional interest rates are seen rising marginally compared to 2018, although the U.S. Federal Reserve’s announcement that it is unlikely to hike rates this year has lessened pressure on regional central banks to tighten their stances.

Regional currencies are seen losing some ground against the U.S. dollar in 2019, as has been the case for the past several years. Sizeable current account shortfalls in many countries, combined with global political instability and trade tensions, will drive the decline. 

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