Muted Private Consumption Will Weigh Heavily On 2023 Growth In Costa Rica
- Fitch Solutions maintained its forecast that Costa Rica will grow by 3.7% in 2022. As expected, headline inflation peaked at a historic high of 12.1% y-o-y in August, the highest since 2009, which has caused household consumption and economic activity growth to slow significantly in the third quarter.
- In 2023, growth is expected to ease to 2.9%, below the 2015-19 average of 3.4%, as net export growth will weaken from a 0.8pp contribution to GDP in 2022 to 0.4pp in 2023, as a slowdown in tourism growth will overshadow easing consumer goods imports.
- However, mounting headwinds, such as elevated inflationary pressures and interest rates, will yield weaker activity primarily in the US, the Netherlands and Central America (which together receive roughly 60.0% of Costa Rican goods exports) in 2023. This will dampen these markets’ demand for goods exports as well as tourism.
- Private consumption growth is expected to stagnate from a 1.9pp contribution to GDP in 2022 to 1.8pp in 2023. The primary driver of weak household consumption in the year ahead will be persistent inflationary pressures. Inflation is expected to come down from an average of 8.7% y-o-y in 2022 to 6.3% in 2023, which would be the second-highest level since 2009, eating into households’ purchasing power and weakening spending in real terms.
- Further, the Banco Central de Costa Rica (BCCR) is expected to raise its policy rate to 9.25% by end-2022 – with risks skewed to the upside – and will keep it elevated through H1 2023, which will increase the cost of borrowing, exerting downward pressure on investment for businesses. Investment will decline from 0.4pp contribution to headline growth in 2022 to 0.3pp in 2023, primarily due to tighter monetary policy.
- A less-severe slowdown in US growth poses an upside risk to Fitch’s growth forecast. If the US economy’s slowdown is less pronounced than Fitch’s forecast, particularly if inflationary pressures continue to ease or if the US Federal Reserve undertakes a less aggressive rate-hiking approach, Costa Rican export growth would see a less severe slowdown than currently forecast.
(Source: Fitch Solutions)