Economic growth waned in the second quarter, with GDP increasing 5.4% on an annual basis (Q1: +8.4% year on year). Q2’s reading was the worst since Q1 2021. Higher inflation and interest rates and cyberattacks on key government institutions—including the Customs Department—depressed growth.
The slowdown was driven by weakening private consumption, fixed investment and exports. Household spending growth slowed to 2.9% in Q2 (Q1: +4.9% yoy), dented by the highest annual rate of inflation in 13 years in May–June. In addition, fixed investment contracted 2.2% in Q2 (Q1: +25.9% yoy). Monetary policy tightening in response to mounting price pressures played a role: By the end of Q2, the key interest rate had been increased by a cumulative 475 basis points since the beginning of the cycle. More positively, government consumption grew 7.4% in the second quarter (Q1: +2.2% yoy).
On the external front, exports of goods and services growth decelerated to 6.8% in Q2 (Q1: +16.9% yoy) amid a slowdown in key trading partners. Imports of goods and services also deteriorated, contracting 1.0% in Q2 (Q1: +19.6% yoy).
Turning to Q3, the economy appears to be cooling further. As a small, open economy, Costa Rica is particularly vulnerable to increases in global food and energy prices. Inflation will continue to hamper growth by eroding purchasing power and weakening consumer spending. Moreover, additional monetary tightening—July saw a 200-basis point hike by the Central Bank—will undermine investment. The economic slowdown in Costa Rica’s key trade partners will continue to drag on its external sector.
Looking further ahead, government debt stood at 68% of GDP in 2021, and fiscal consolidation is a key priority for President Chaves—who assumed office in May 2022—as he seeks funding from the IMF. This bodes poorly for growth in government spending in the medium term.
On the outlook for 2022, analysts at the EIU commented:
“We do not expect the Russia-Ukraine war to have a dramatic effect on Costa Rica’s overall economy, but the resulting supply-chain disruptions are causing an inflation spike that will discourage private consumption through a fall in real wages. This, along with disruption to trade flows resulting from Conti’s cyber-attack on Costa Rica’s customs system, will cause real GDP growth to slow this year, to 3.5%.”
FocusEconomics panelists see the economy expanding 4.4% in 2022, which is up 0.3 percentage points from last month’s projection, and growing 3.5% in 2023.