Why is the economy in a significant slowdown?... and what to we expect in the short term
Our growth projections for 2018 (3.8%) are lower than what international analysts have argue. ECLAC projects 5.2% growth for the year despite a month-long labor strike in the construction sector from mid-April to mid-May (construction represents almost twenty percent of GDP). IMF is not so optimistic: its mid-year forecast was cut from 5.4% to 4.6%. Our projection (GSP, May 2018) before the labor strike was 4.5% and was adjusted to 3.5% to account for the event. The revision of some information, especially in the public sector expenditures projections for the last quarter of the year, increased slightly our forecast to 3.8%, still down from the consensus. For the second year in a row our estimations are lower than the international organizations’.
The negative effect of the strike itself was more than 1% on the level of GDP. The re-initiation of the construction activity after the end of the struggle -especially in the private projects- was not automatic: it took between fifteen days and a full month to reinitiate activities. The total area of construction is down almost 50 percent. On-going projects will continue to develop, but financing for new investments will be marginal, according to bankers. According to sources In the industry, the stock of housing supply is equivalent to 28 months of the demand; the ratio for commercial space is 64 months; and for office space is 13 years. So private construction will not be an engine of growth soon.
The growth rate of private consumption continues to stall because increases in interest rates on personal loans. As we have been argued since 2017, the high and accelerating private debt is one of the principal elements of risk for the economy in an environment of higher costs of borrowing.
Total investment (private and public) will continue to be important in the future (the investment/GDP ratio is the largest in Latin America at 39% average in the last three years). However, its largest component is linked to construction (public sector investment/GDP is around 6% and private sector investment in construction/GDP is around 28% in 2017). Therefore, the strike affected both sources of investment.
Exports of services continue as the main sources of demand in 2018 and in 2019, but the numbers are not staggering. Tourism is flat, hotel occupancy rates are down for the third consecutive year; Colon Free Zone is not growing in the traditional re-export business but in an opportunistic window in the pharmaceutical market.
Panama Canal revenues and traffic continue their dynamism. Sea-ports (around 3 percent of GDP) are not growing at all. Exports of traditional goods are flat in real terms.
The reasons for optimism in 2019 are several. Public construction will have a full year of activity (compared to less than eleven months in 2018). Exports of copper will reach US 1 billion (from zero in 2017), double the rate of growth of exports.
In January a positive shock of demand will result from the JMJ event (World Youth Day), a Catholic Church-sponsored international meeting, which is in fact a one-week series of activities that is expected to receive at least 200 thousand participants, a large proportion from overseas. Large investments by the Central Government will increase especially in large infrastructure projects: Line 2 of the Metro rail (US 539 million), the expansion of the road from Panama City to the west, among other large investments.
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