Although average regional economic activity is seen shifting into a higher gear this year, mainly owing to a recovery in Puerto Rico and stronger momentum in Panama, most countries are seen slowing amid easing momentum in the United States. Uncertainty over U.S. immigration policy, exposure to extreme weather events and the crisis in Nicaragua pose key downside risks.
Guatemala Economic Outlook
Second quarter data suggests the economy firmed up, with growth in the economic activity index accelerating slightly in April and remittances growth picking up in May–June. That said, while remittances growth should have supported household expenditure in the quarter, likely stronger inflationary pressures will have likely limited the expansion somewhat. Moreover, the merchandise trade deficit rose in April. This follows a weak first quarter as underlined by growth in the economic activity index moderating throughout the period, and amid rising inflation and a marked drop in remittances growth in the period. In the political arena, Sandra Torres and Alejandro Giammattei came out on top in the first round of the 16 June presidential election. A run-off vote is scheduled for 11 August.
Robust domestic demand should keep economic growth stable this year. Public expenditure and fixed investment growth are expected to accelerate; however, private consumption is seen moderating, likely reflecting less robust economic growth in the U.S. and uncertainty regarding its immigration policy. Domestic political uncertainty also poses a downside risk.
FocusEconomics Consensus Forecast panelists expect the Guatemalan economy to expand 3.1% in 2019, which is unchanged from last month’s forecast, and 3.2% in 2020.
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Dominican Republic Economic Outlook
The economy appeared to lose momentum in the second quarter, in the context of a likely slowdown in the U.S. and greater international trade uncertainty. Economic activity growth in April and May averaged notably below Q1’s reading, while remittance growth slowed in April. However, strong private credit and a cash injection from the Central Bank should have propped up activity. This comes after growth dimmed in Q1 but stayed healthy compared to regional peers, buttressed by the construction sector. In other news, the IMF concluded a staff visit in mid-June. While praising the robust economic performance in recent years, the Fund urged the government to undertake further fiscal adjustment to put the public debt ratio on a firm downward path. In the tourism sector, the recent bad press over deaths of visitors could hamper arrivals in H2; early indicators suggest recent flight bookings from the U.S. for July and August have plummeted.
Growth should ease this year on a high base effect, a slowing U.S. economy and possible softer tourist arrivals in the second half. Nevertheless, the expansion should still be notably above the regional average, supported by monetary loosening. Volatile energy prices and a possible faster-than-expected slowdown in the U.S. are the main downside risks.
FocusEconomics panelists expect GDP growth of 5.4% in 2019, which is up 0.1 percentage points from last month’s forecast. For 2020, panelists see the economy expanding 4.8%.
Panama Economic Outlook
Growth tumbled in the first quarter to the decade-low level logged in Q2 2018, largely due to lower growth in the country’s most important sectors. Notably, the U.S-China trade war and diminishing global growth prospects hampered the shipping sector, while financial service activity also moderated and construction slowed, despite demand for public works. Turning to Q2, the economic activity indicator remained weak in April, while activity in the Colon Free Trade Zone continued to sharply contract in the same month. Moreover, Panama Canal data shows cargo volumes contracted in April and May. On the flipside, cargo volumes in national ports sharply rebounded in May. In other news, Cobre Panama exported its first batch of copper ore on 14 June, totaling 32,200 tons, boding well for exports in H2. Meanwhile, Panama was re-added to the grey list of the Financial Action Task Force in late June, though the economic impact will likely be limited.
Growth is expected to pick up steam this year on higher private spending and strong public infrastructure investment, coupled with the ramp-up of the Cobre Panama mine. Lower global growth and a further deterioration of U.S-China relations remain key downside risks to the outlook.
FocusEconomics Consensus Forecast panelists project that the economy will grow 4.6% in 2019, which is down 0.3 percentage points from last month’s forecast, and 4.5% in 2020.
Costa Rica Economic Outlook
Economic growth rebounded in the first quarter of 2019, after growth in Q4 2018 slowed to the lowest rate in nearly six years. The economic expansion at the outset of this year was supported by quicker private consumption growth, which benefited from a lower unemployment rate. Nonetheless, consumer spending growth was undoubtedly capped by consumer confidence in the quarter plunging to its most pessimistic level since September 2002. A slump in fixed investment and strong import growth, meanwhile, further detracted from GDP growth in Q1. Turning to the second quarter, the economic picture looks mixed so far. On the one hand, consumer confidence increased slightly in May, although consumers remained deeply pessimistic; on the other hand, economic activity growth fell to an over five-year low in April, weighed on by a struggling agriculture sector.
The economy should hold steady momentum this year. On the upside, a clearer investment picture following last year’s fiscal reforms, which are slowly coming into effect, should support economic activity, as should a looser monetary policy. However, instability in Nicaragua and global trade tensions weigh on the outlook.
FocusEconomics Consensus Forecast panelists expect GDP to grow 2.7% in 2019, which is down 0.1 percentage points from last month’s forecast, and 2.8% in 2020.
Central America Monetary & Financial Sector News
Regional inflation was 2.4% in May, up slightly from April’s 2.3%. Inflation is expected to pick up from its current low level by year-end, but should remain moderate amid mild economic activity in most countries. The evolution of oil prices will be a key factor to watch.
Over the last month, the Central Banks of the Dominican Republic and Costa Rica reduced their policy rates amid a more dovish U.S. Federal Reserve and flagging domestic activity. The regional average interest rate is seen ending 2019 below its end-2018 level, and the Fed’s looser stance could provide leeway for central banks to make further rate cuts in coming months if necessary.
Currencies in the region are expected to lose ground against the dollar this year, on the back of sizeable current account deficits in some countries and lingering global trade tensions. Political fragility in some countries, chiefly Haiti and Nicaragua, could put further pressure on exchange rates.
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