Costa Rica's export sector registered a massive 7.9% year-on-year (y/y) gain in the first quarter, fuelling a headline GDP growth rate of 4.8% y/y, the fastest since the third quarter of 2013.
IHS perspective | |
Significance | Economic growth has been unimpressive in Costa Rica for the several quarters, inching forward at rates well below potential. The first-quarter result breaks that trend, reflecting healthy external demand for a variety of Costa Rica's most profitable products. |
Implications | Economic growth in the upcoming quarters is not expected to maintain this rapid pace, though the recovery in exports was predicted in IHS's baseline forecast. In the remainder of 2016, exports are expected to return to growth rates near 1.0% quarter on quarter (q/q) (down from the massive 9.1% q/q registered in first-quarter 2016). |
Outlook | Through year-end 2016 IHS expects external demand to wane moderately, considering the slowness projected in the US economy as well as the downside risks associated with international instability caused by Brexit. Overall, we project GDP growth near 3.4% over 2016. |
Cost Rica's first-quarter headline GDP result was heavily boosted by strong export growth. Headline GDP advanced at a very healthy 4.8% year on year (y/y), which was the fastest rate since third-quarter 2013. The export sector as a whole grew at a rapid 7.9% y/y pace, making by far the largest contribution to headline growth. Within the export sector, a modest dip for services was more than offset by goods exports, in which medical equipment, pineapples, and bananas were the most influential categories.
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Note: C=consumption, I=investment, X=exports, M=imports |
Although consumption was overshadowed by export growth, domestic demand was relatively healthy in the first quarter, supported by strong private consumption figures, although fixed investment was weak. Consumer spending has continued on a healthy path, with y/y growth at 4.2%. Moderate price levels continue to support consumers. Over the period that data have been collected, inflation has never been as low as currently. These soft prices help incentivise consumers to keep making purchases, which ultimately drives headline private consumption. The fixed-investment category posted a drop in its y/y growth rate to 3.5%. The weakness was mainly due to declining investment in telecommunications and transportation infrastructure, as well as public investment. Previously strong investment rates had been lifted by public investment in electric generation projects, which have recently concluded. Positive results in investment were recorded in industrial developments and commercial activities as well as new home construction.
Public-sector consumption was weak as the government has begun to cut expenditure, as promised amid recent debate over the growing fiscal deficit. Although the quarter-on-quarter (q/q) change was near a 0.1% contraction, the result highlights an encouraging trend. While the government will need to increase inflows of income, lower spending is a healthy development for the stability of the Costa Rican economy in the medium and long term.
Outlook and implications
For the remainder of 2016 IHS expects a moderate deceleration from this very strong first-quarter result. A variety of downside risks have recently emerged, of which the Brexit situation stands out. Although financial markets have stabilised, and most onlookers are proceeding with caution, the potential for international disruption remains quite significant. Costa Rica maintains negligible trading relationships with the UK but the implications for trade with the EU are much larger. If the turmoil spills over into an international crisis, Costa Rica also stands to lose from a plunge in external demand. Our baseline assumes a moderate reduction in economic growth, although the coming quarters will likewise see a stabilising fixed investment rate, a stable export sector, and a healthy consumer spending result.
Private consumption looks likely to remain the brightest point for the Costa Rican economy. Overall, it represents 65% of total GDP and in 2016 we expect year-end growth near 4.0%. We believe moderate prices will continue, inflation will remain subdued, and y/y rates will remain well within the central bank's target range. For consumer price index (CPI) inflation, we expect the 2016 year-end figure to be near 2.6%. The tourism industry will remain relatively healthy through year-end 2016, with the hotels and restaurants sub-category contributing handsomely to the headline GDP growth rate. The US economy is projected to slow moderately on international turmoil caused by Brexit. However, demand for Costa Rica's tourism services will remain broadly intact. Overall, Costa Rica will post another lacklustre GDP growth rate by year-end 2016, currently projected near 3.4%.