Private Consumption To Bolster Growth
BMI View: Given robust high frequency data in recent months, and our expectation that private consumption will exceed our earlier expectations, we have revised up our 2012 real GDP growth forecast for Costa Rica . W e also maintain our view that fixed investment will remain an important driver of growth over the coming quarters .
Following robust private consumption in the year-to-date, we have revised up our 2012 real GDP growth forecast for Costa Rica to 4.2% from 3.7% previously. While we believe a slowdown in economic activity is underway, as indicated by the deceleration in the monthly economic activity index (see chart below), the economy's robust performance in H112 means that such a cool down will be more modest than we initially anticipated. In addition, we have boosted our 2013 real GDP growth forecast modestly to 3.6% (from 3.5%) to reflect our expectation of a boost in government spending next year in advance of the 2014 presidential and legislative elections.
|Costa Rica - Monthly Economic Activity Index (IMAE), % chg y-o-y|
Private Consumption Gets An Upgrade
Following strong data in H112, we are revising up our forecasts for private consumption's contribution to real GDP growth this year to 2.6 percentage points (pp) from 2.2pp. This implies real private consumption growth of 4.0% this year, up from our previous forecast of 3.3%. We maintain our 2013 forecast for real private consumption growth of 4.2% next year.
|Expecting Continued Growth|
|Costa Rica - M1 Money Supply And Private Sector Credit Growth, % chg y-o-y|
This revision comes largely on the back of potential for more accommodative monetary policy during H212 than we previously anticipated. While we have long highlighted that the central bank's concerns about stoking inflationary pressures in the face of expansionary fiscal policy would imply a less accommodative policy stance this year, with M1 money supply growth dropping into negative territory in May for the first time since 2009, we believe monetary policy could be somewhat more supportive in the latter half of the year. As such, despite that private sector credit growth has leveled off in recent months, it could hold up better than we initially expected during the latter half of the year. Furthermore, with the US Federal Reserve's recent announcement of a third round of quantitative easing, we believe the Costa Rican colón will continue to receive a boost over the coming weeks, bolstering consumers' purchasing power.
Fixed Investment To Remain Strong
Due to a strong infrastructure project pipeline, we maintain our forecast for gross fixed capital formation to contribute 1.9pp in 2012 and 1.4pp in 2013 to real GDP growth, implying real growth of 8.4% and 5.9% respectively. We attribute this modest deceleration to base effects following substantial 43.6% increase in foreign direct investment in 2011 and continued weakness in the global economy. Nevertheless, the US$1.8bn transfer and container terminal projects at Moin port, as well as a US$1.2bn hydroelectric plant, will keep investor interest well-anchored over the medium term.
Net Exports A Modest Drag
Given our expectation of a moderation in import growth over the coming quarters, we maintain our view for net exports to subtract just 0.7pp from real GDP growth in 2012, and 1.0pp next year. Total imports expanded by 9.1% y-o-y between January and June, marking a slowdown from the 18.3% surge recorded during the same period of 2011. While consumer goods imports (19.8% of total imports during H112) remained relatively buoyant on the back of relatively strong credit growth and currency strength, primary and intermediate products, led the slowdown. We expect this trend to continue over the coming quarters, as a moderation in investment feeds through to less robust import growth. Moreover, exports of manufactured goods and those from the free trade zones have held up well in H112, supporting our view that net exports will be a less negative contributor to growth this year and next.