REAL SECTOR | Growth momentum stays solid in most countries, although Puerto Rico distorts the regional picture Preliminary estimate...

Central America and Caribbean Economic Outlook Worsens

REAL SECTOR | Growth momentum stays solid in most countries, although Puerto Rico distorts the regional picture Preliminary estimates suggest the economy of Central America and the Caribbean remained largely in good shape at the outset of the year, with growth expected to have reached 2.1% annually in Q1. This marks a 0.6 percentage-point downward revision compared to last month’s estimate, largely driven by a larger expected contraction in Puerto Rico, one of the region’s largest economies in nominal GDP terms. However, excluding Puerto Rico, the region’s Q1 growth figure would have seen only a mild downward revision compared to last month’s forecast. The Dominican Republic has been the region’s standout performer so far this year, with the economy buoyed by monetary stimulus that has spurred credit growth. Following a stellar Q1 GDP reading, economic activity increased at an over one-year high in April, spearheaded by the construction sector. New hotel, residential housing and energy projects currently underway are turbocharging activity in the sector, as firms take advantage of cheaper financing conditions. While national accounts figures for the first quarter are still outstanding in Guatemala, economic activity growth also edged higher in the first four months of the year compared to Q4. The picture is similar in Costa Rica: Economic activity growth in the January–April period tracked slightly higher than in October– December. Costa Rica’s fiscal situation is still worrying but has improved slightly in recent weeks, after the new government announced austerity measures to rein in the public wage bill. However, more fundamental reforms are still needed to put public finances on a sustainable long-term footing. On the other hand, the Panamanian economy has lost steam in recent months on the back of a downturn in the construction sector, which was deepened by a month-long strike paralyzing building activity in the country. To reignite growth, the government recently announced a substantial spending boost for large-scale infrastructure projects. Honduras has also seen momentum ebb so far this year due to a weaker agricultural sector, partly caused by unusually warm weather. Throughout the region, countries have seen a continuing surge in remittances so far this year, linked to a robust labor market in the U.S, where the unemployment rate is currently at the lowest level in 18 years. In May, Guatemala saw the highest inflow of 1.5 2.0 2.5 3.0 3.5 4.0 Q1 15 Q1 16 Q1 17 Q1 18 Q1 19 2.0 2.4 2.8 3.2 3.6 4.0 Nov Feb May Aug Nov Feb May 2018 2019 Central America & Caribbean Economic Growth Change in GDP forecasts Note: GDP, real annual variation in %, Q1 2015 - Q4 2019. Note: GDP, evolution of 2018 and 2019 forecasts during the last 18 months. FOCUSECONOMICS Summary FocusEconomics Consensus Forecast Central America and Caribbean | 4 June 2018 remittances on record at over USD 800 million. This influx of capital is supporting domestic wages, private consumption and international reserves. In contrast, the regional external sector’s contribution to growth has likely weakened so far this year on a higher oil import bill. On the political scene, ongoing unrest in Nicaragua is generating uncertainty and damaging the country’s relatively successful economic trajectory over recent years. Tourism and inward investment will almost certainly be hard by the upheaval—as the Central Bank’s governor recently warned—as will domestic sectors. Efforts are underway to reestablish a dialogue, which broke down in May, between the government and different sectors of civil society. Talks have yet to begin, however, and in the meantime violence continues. OUTLOOK | Regional growth revised down on worsening dynamics in Puerto Rico The Puerto Rican economy is expected to drag heavily on regional growth this year, as the economy continues to suffer the aftereffects of hurricanes Maria and Irma, and the ensuing destruction to physical infrastructure and power outages. Elsewhere in the region, the outlook is somewhat brighter. Economies will continue to benefit from fiscal stimulus in the U.S—by far Central America and the Caribbean’s largest trading partner—which should in turn continue to boost remittances, exports and tourist arrivals. However, higher international oil prices will weigh on the region’s external sector. Key downside risks stem from the potential faster- than-expected monetary tightening by the U.S. Federal Reserve— which would weigh on regional credit growth, investment and private spending—and tougher U.S. immigration policy, which could disrupt remittance inflows. Citizens from El Salvador, Haiti, Honduras and Nicaragua currently residing in the U.S. are already set to see their Temporary Protected Status end within a few years, which could lock many of them out of the U.S. labor market. FocusEconomics panelists expect regional GDP growth of 2.1% this year, which is down 0.5 percentage points from last month’s estimate. This is largely driven by a greater expected contraction in regional heavyweight Puerto Rico, as the full impact of the devastation caused by last year’s hurricanes becomes clear. There was also a notable downgrade for Nicaragua due to continuing violent unrest. Belize, Haiti, Panama and Trinidad and Tobago also saw their projections downgraded this month. Conversely, the GDP forecast for the Dominican Republic was revised upwards following the recent string of positive economy data, as was Jamaica’s. The region’s remaining economies saw their projections unchanged. Regional GDP growth is seen accelerating to 3.7% in 2019. Panama’s economy is expected to log the highest increase in the region despite a soft start to the year, the result of higher Panama Canal earnings and robust fixed investment levels. GDP in Panama is projected to increase 5.4%. Conversely, Puerto Rico is expected to be the region’s worst performer, recording a contraction of 8.0% in FY 2018.

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