Consequences of the Russia-Ukraine war
Costa Rica´s growth will slow in 2022, but won´t stop over the consequences of the Russia-Ukraine conflict. Three transmission channels will negatively impact the economy: less favorable external trade, higher international prices and tighter financial conditions. These factors are pushing growth below the 4% rate estimated a few months ago. Overall, the effects of the military crisis in Ukraine will be marginal for Costa Rica. The economy will grow less than expected, and family spending will be minor due to higher inflation and exchange rate depreciation, but we don´t foresee imminent recession. The economy is enjoying favorable winds. FDI is booming, thanks to the nearshoring trend; the progress in COVID-19 vaccination is remarkable; and the country’s main trading partners are still growing at above the potential growth rate. There won’t be major near-term changes in economic policies, and fiscal adjustment will continue in coming months.
Guatemala is one of the few countries where high inflation is not a problem, at least for now. The country is enjoying solid macroeconomic indicators, especially compared with other Central American countries. This doesn´t mean that the economy is isolated from the economic consequences of the Russia-Ukraine war. Economic data is signaling a change in the generous outlook presented at the beginning of the year. One of the effects of the war is the deterioration in the external accounts, due to a higher imports bill. Economic activity is also slowing -- at least according to IMAE data. Changes in U.S growth forecasts are signaling an external front less supportive than estimated a few weeks ago. We don´t see major reasons to worry about Guatemala’s performance. Growth will still be close to its long-term potential. As stated in previous reports, the economy has several strengths that make it suitable for attracting more FDI.
El Salvador continues its long-term path of economic activity, after two quite atypical years. But this time risks have increased, according to the fiscal unsustainability analyzed in our April short-term outlook, now aggravated by the negative effects from the Russia-Ukraine war. External conditions are turning adverse for El Salvador, due to deceleration of foreign remittances and trade, as well as the ramping up of imported inflation that impacts spending decisions of all economic agents. The evolution of conjunctural indicators looks consistent with our estimates of lower economic growth and higher inflation, at least this year. On the other hand, political conditions continue to lend great support to the government, but with external conditions less favorable than predicted.
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