Economic growth continues at a stable rate while inflation data has remained under control; the policy interest rate stands at 3%, which is decidedly accommodative and has been supporting economic activity.
Implications | The expectation of sustained US growth will support Guatemala through the short term, although a variety of downside international risks, Brexit being one, will leverage moderate downward pressure on the Guatemalan economy. |
Outlook | The remainder of 2016 will be defined by economic stability, although growth rates will tend towards slightly below potential; inflation will remain subdued with a year-end rate near 3.6%, and private consumption will be healthy leading to year-end GDP growth near 3.5%. |
Economic activity
Recent trends have shown that Guatemalan economic activity is continuing at stable rates, albeit unimpressive and slightly below potential GDP growth. Private consumption continues to be a major driver of growth as remittances continue to be strong, inflation has been below the long-term average rate, and interest rates remain very accommodative. External balance has suffered a moderate reversal as a result of mild increases in oil prices, especially relative to the lows that had been achieved prior, while exports of agricultural products have been somewhat weak. Nevertheless, external demand conditions remain healthy, and despite weather conditions that may affect export results in an unexpected way, headline exports should recover and register healthy results in the short term. Imports will likewise stabilise as oil prices and many other commodities continue to exhibit only mild price growth.
*cpv= private consumption; cgv= government consumption; gcf= fixed investment; x= exports; m= imports
Private consumption continues to be the major bright spot for Guatemala. One of the largest drives of this phenomenon is the very healthy remittance inflows. Remittance growth rates have been stronger than the historical average, which has been driving record level inflows in recent months.
Inflows were healthy in 2015, but IHS Markit expects the streak of positive results to continue for year-end 2016 and into the short term. These inflows are critical to the Guatemalan consumer, fuelling many areas of consumer spending from rent, to healthcare, to non-durable goods purchases, as well as various service-based products.
Inflation summary
Consumer prices have been stable, with the year-on-year (y/y) rate at a very controlled 4.4% through June 2016, well within the central bank's target range of 4% plus or minus 1%. Transportation-related goods and services continue to put downward pressure on the aggregate index, given the continuation of subdued oil prices and the strong effect that leverages on those sub-components. Meanwhile, food and drink prices are strongly driving up the aggregate index as prices have reached near double-digit inflation on a y/y basis; the food and drink category accounts for approximately 29% of the total basket of goods and therefore drives headline movements strongly. The transportation component represents around 11%, which has helped mitigate some of the strong upward pressure on the index driven by food and drink prices.
M/M | Y/Y | |||||
|---|---|---|---|---|---|---|
Jun 16 | May 16 | 2013 | 2014 | May 16 | Jun 16 | |
CPI inflation, total (Dec. 2010=100) | 0.3 | 0.5 | 3.4 | 2.4 | 4.4 | 4.4 |
Food and non-alcoholic drinks | 0.3 | 0.8 | 7.5 | 9.3 | 10.0 | 9.4 |
Transport | 1.6 | 0.6 | 0.1 | -7.1 | -3.2 | -1.9 |
Housing, water, electricity, gas, and others | 1.1 | 0.5 | 1.9 | -6.3 | 3.3 | 4.7 |
Health | 0.2 | 0.2 | 2.2 | 1.9 | 1.9 | 1.9 |
Education | 0.0 | 0.0 | 0.9 | 0.6 | 0.6 | 0.6 |
Recreation and culture | 0.4 | 0.0 | 2.1 | 1.9 | 2.4 | 2.9 |
Restaurants and hotels | 0.1 | 0.4 | 2.2 | 2.2 | 2.6 | 2.4 |
Other goods and services | 0.2 | 0.4 | 2.5 | 2.0 | 2.2 | 2.2 |
Source: Source: National Institute of Statistics, Bank of Guatemala© 2016 IHS | ||||||
The misalignment of food and non-alcoholic drink prices with other areas of the consumer basket of goods highlights a potential downside risk for Guatemala. Although inflation across the different sub-categories of goods and services included in the consumer price index (CPI) has historically tended to move in concert in Guatemala, these large deviations of the sub-components from the headline rate could cause the food and non-alcoholic drink price inflation to creep into other areas of the CPI. The mechanics behind such a development would essentially flow from Guatemalans experiencing higher food prices, translating to other sectors of the economy charging higher prices to compensate for the decreased purchasing power, as well as the increased perception of inflation. Our baseline projections expect that food and drink prices return to an inflation rate consistent with other sub-categories over the medium term.
Exchange-rate movements have been broadly stable in recent months, and in fact, the Guatemalan quetzal has appreciated modestly since the announcement of Brexit. Overall, we expect the Guatemalan exchange rate to continue to lie within a stable range, which further supports our outlook and call for generally stable economic activity in the country. Relative to other Latin American countries, Guatemala maintains an extremely stable exchange rate, and has done so for over 10 years.
Outlook and implications
The Brexit situation will affect Guatemala moderately in the short and medium term, mainly through trade. As with other Latin American countries, direct trade with the United Kingdom is quite small, although trade with the wider European Union is larger, and therefore more of a significant factor. However, although large instability and volatility directly followed the announcement of Brexit, a very large degree of uncertainty prevails, and currently scepticism about a major international crisis seems to have waned. Year-end 2015 remittances exhibited over 13% y/y growth ending 2015 at USD6.3 billion; so far in 2016 these inflows have been very healthy, and we expect remittances to total near USD7 billion by year-end 2016. Regarding inflation, we expect prices to continue at broadly stable rates, with year-end 2016 projected at 3.6%. We maintain that economic activity will remain broadly healthy despite the downside risks looming, most notably Brexit. The main drivers of this Central American economy remain in place for healthy growth into the short term. Specifically, the US economy is projected to perform relatively well through year-end 2016 and into 2017, which has large positive spillovers for Guatemala. Healthy US growth positively affects Guatemala through increased demand for Guatemala's exports, healthy inflows of remittances, stronger tourism inflows, and increased foreign direct investment. For year-end 2016 we expect Guatemalan GDP to grow by 3.5%.