RECENT ECONOMIC DEVELOPMENTS
Growth is strengthening in 2019. Economic growth strengthened in the first half of 2019 to 3.6 percent, its fastest rate since 2016. Wholesale and retail trade were the main drivers of growth, accounting for 1.5 percentage points (pp). Agriculture contributed a 0.5 pp contribution, while industry contributed 0.4 pp despite a slowdown in manufacturing evident in the second quarter of 2019. Construction also added 0.1 pp, but this is expected to be temporary as surveys for the sector point to positive expectations from companies in terms of contracts, prices, and employment.
On the demand side, the main contributors to growth in the first half of 2019 were investment and private consumption, the latter spurred by rising wages, pensions, and household lending. Net exports subtracted from growth for the second consecutive quarter, as rising exports were not enough to compensate for the growing imports of intermediate, capital, and consumer goods. Although private consumption is expected to moderate by year-end, investments will strengthen, partly due to an acceleration of public investments. However, net exports are expected to continue to subtract from growth because rising exports will not be enough to compensate for a surge in imports, mainly capital and intermediary goods. Growth for 2019 is expected to reach 3.1 percent, up from 2.7 percent in 2018.
The labor market has continued to improve. Employment went up by 5.2 percent year-on-year (y-o-y) in the first half of 2019 after averaging 2.5 percent in 2018. Most of the new jobs were in manufacturing, transport and storage, administrative services, and entertainment. The employment rate improved to 47.0 percent—up an annualized 2.3 pp. Unemployment fell to 17.7 percent in the first half of the year, a historic low, and the participation rate stayed at 57.1 percent. It is estimated that for 2019 as a whole, unemployment will decline to 19.4 percent.
Despite a rise in tax and contribution rates, the fiscal deficit widened in 2019. In the first half of the year, government revenues went up 6 percent y-o-y. Higher rates for social contributions were introduced in January, a higher statutory rate for personal income tax was introduced while exemptions were reduced, and tobacco excises were increased. However, spending went up by 8.4 percent y-o-y due to rising pensions, wages, subsidies, and health spending. Capital spending, although rising, is still vastly under-executed. The revised 2019 general government deficit is projected at 2.5 percent of GDP (the World Bank estimate stands at 2.4 percent), up from 1.1 percent in 2018; when combined with the deficit of the Public Enterprise for State Roads, the total deficit estimate is 2.7 percent. A budget revision led to a further increase in subsidies for social contribution payments to incentivize the formalization of wages paid in cash, subsidies to agriculture, and a 15-percent paid value added tax refund to citizens upon submission of tax receipts to strengthen tax compliance. Public and publicly guaranteed debt is expected to rise from 48.5 percent in 2018 to 51 percent in 2019, as government borrowing intensifies to meet coming obligations and guaranteed debt also goes up as public investment in roads accelerates.
The outlook for the economy is moderately positive, with annual average growth predicted to be about 3.2 percent through 2021. Investment (e.g., public investment in highways and private investment in energy and tourism) will be the main driver of growth. It will be supported by personal consumption as employment picks up and wages continue to grow, propelled by a higher minimum wage that will mostly affect private sector employees. Net exports are expected to subtract from growth as external demand weakens somewhat. This baseline scenario is accompanied by rising risks, in particular external risks, as there are increasing signs of a slowdown in the EU and the global economy, affected by global trade disputes and other concerns.
Fiscal consolidation is expected to continue, though more slowly due to new spending programs. The Government has introduced two programs to fight informality, which is estimated at 30–40 percent of GDP, the annual cost of which is estimated to be 0.8 percent of GDP. Although these programs have been accommodated within the planned deficit for 2019 due to lower capital spending, for the medium term, they should be offset by other spending or revenue measures to avoid increasing fiscal vulnerabilities. These efforts are intended to tackle informality, which is a major drag on the economy; however, they are unlikely to be successful unless they are accompanied by a strengthening of tax administration, greater inspection efficiency, and improvements in the delivery of public services and in laws affecting the business environment. More info on WeBa RER – www.worldbank.org/eca/wbrer.
Last Updated: Oct 25, 2019