At least six factors to the economic policy decisions adopted by the new United States administration will influence Central America and it is forecast that the GDP of the region reaches an average of 3.6% by 2025 and 3.7% in 2026.
“The feeling of uncertainty in the international environment has intensified significantly due to various factors that are affecting the expectations of performance of the US economy, the main commercial partner of Central America and the Dominican Republic (Card),” underlines a report by the Executive Secretary of the Central American Monetary Council (SECMCA) based in San José Costa Rica.
For Guatemala, a 3.9% GDP growth is estimated in 2025 and by 2026 in 3.7% as well as an inflation rate of 2.9% and 3.8% respectively.
Base scenario
The analysis elaborated by the economist Wilfredo Díaz Cruz, which is part of the technical team of the SECMCA, uses the medium -term macroeconomic forecast model for the card, which includes different variables and in which it highlights a growth of the GDP of the United States of 1.8% by 2025; The price of WTI oil barrel (reference for the region) of US $ 62.8 and a reference rate of the Federal Reserve (FED) of 4%.
The document states that, with these cases, the region grows at 3.6% for this year and 3.7% the following year. While inflation will remain “low and controlled” by 2.6% in 2025 and 3.2% by 2026.
“The region grows in 3.6% for this exercise and 3.7% the following year. While inflation will remain” low and controlled “by 2.6% in 2025 and 3.2% by 2026”
Central American Monetary Council Report
In addition, that bank credit to the private sector would grow in 9% this year and 10.8% next; Exports 5.5% and 8.3%. And parals of family remittances, for the northern triangle countries (Guatemala, El Salvador and Honduras), Nicaragua and the Dominican Republic, an expansion of 9.4% in 2025 is projected and for the next year at 7.8%, among other indicators.
Scenario management
The report prepares three alternative scenarios that can respond to different trajectories about GDP growth in the US, for this year, which would be associated with economic policy decisions. It is clarified that for the following years a recovery of the American economy would be expected to be at a value close to 2%.
For the first scenario, it is considered a possible 2% contraction of GDP that would be observed in the first semester of 2025, and then show a recovery in the second semester and reach as a whole an interannual growth rate of 1%.
In a second scenario “a stagnation of productive activity in the US is expected, registering an interannual variation of 0% in GDP.
And for the third scenario, a nearby 2% GDP contraction is expected, although in this case it would be projected that the FED reduce the reference rates more accelerated to be 2.75% at the end of the year.
The objective of the construction of these forecasts of the US economy., According to the document, “as would be expected in each of the scenarios, the productive activity of the region is slowed to the United States GDP presents a worse performance.”
Then, “a reduction in regional GDP growth would be expected in 2025 compared to the base stage of 2.8 percentage points, in the worst case.”
For inflation, there will be no significant changes, but it is noted that in this situation the stress of production is that inflationary pressures decrease.
Finally, for regional exports – always in this scenario – it would remain at 5% in this year, but a deceleration would be observed by 2026 in 0.4%. The remittances would maintain a positive dynamic position with 4% for Guatemala, El Salvador, Honduras, Nicaragua and the Dominican Republic.
Warning sheet
In the conclusions of the SECMCA document, it states that unlike other negative performance contexts of the US economy, such as the financial crisis in 2008 and 2009, as well as the pandemic in 2020, this time the causes are caused by commercial protection decisions.
These possible effects towards the region are indirect and suppose important difficulties in recognizing and identifying their different transmission channels.
“The region could be affected from the commercial point of view, but not by the imposition of greater tariffs, but rather by a moderation of the internal consumption of the USA, which would affect the export of goods in the region, which are mainly of raw materials and some manufactured goods,” he says.
In addition, it is not clear if foreign direct investment flows (FDI) can increase or go back in the region, and in the case of an alleged contraction, Costa Rica and the Dominican Republic could be the most affected, but the opposite can also occur, as main receptors.
Also, there may be a contraction of travel from American tourists, and again Costa Rica and the Dominican Republic, they would be impacted by the weight of activity in their economies.
It would be different for the countries of the Northern Triangle and Nicaragua that could better support a possible contraction of the US.
“Remittance flows in these countries would serve as a mattress that could soften internal consumption, maintaining productive activity in these economies in the face of a worse performance of the United States,” they indicate the document.
What he recommends
The regional report states that it is important to consider that the second import partner in importance for the card region is the same region. This would imply that, “although the US economy, it can affect the commercial channel to some extent, this effect could be partially compensated by intra-regional trade, added to that sustained with other extra-regional commercial partners of importance such as Europe and China.”