Costa Rica Growth Mostly Holding Up Despite US Slowdown

• Fitch Solutions has revised its 2023 growth forecast for Costa Rica from 2.9% to 3.2%, and is now projecting growth to slow to 2.5% in 2024.
•  The latest national accounts release shows that real GDP in Q123 performed better than initially expected, growing 4.5% y-o-y. This was underpinned primarily by a strong performance in exports, which grew by 15.8%, while private consumption and fixed investment both grew by 3.0%.
• Fitch’s upward revision is also supported by a strong performance of leading indicators in Q223. Expansions in the Monthly Index of Economic Activity (IMAE) have been accelerating in the last three months, with the latest growth rate coming in at 7.4% y-o-y in May.
• This is likely impacted by the Banco Central de Costa Rica’s (BCCR) dovish monetary policy stance, having already implemented three rate cuts since March 2023 as inflation has cooled sharply.
• The fixed investment will likely accelerate in the months ahead, while private consumption growth will remain fairly robust, further supporting growth in H223 and 2024 and adding to Fitch’s upward revision for 2023.
• That said, the deceleration in headline growth vis-à-vis H123 will be driven by softer export demand induced by the weakening of US growth in 2023 and 2024.
• Costa Rica’s key trading partner is the US, which serves as a destination for half of the market’s goods exports. Costa Rica also relies on the US as a source of tourists. US growth is projected to slow down from 2.1% in 2022 to 1.6% in 2023 and 0.6% in 2024 with a technical recession likely at the start of 2024, implying softer export demand for Costa Rica in the quarters ahead.

 (Source: Fitch Solutions)