Brighter perspectives ahead
The Q1 2025 economic performance brings cautious hope for the future. GDP grew 3.4% y/y and 3.5% q/q. All industries with the exception of education, health and communications registered positive changes in the quarter, as opposed to Q1 and Q4 2024. Household consumption jumped from negative 3.8% y/y to a 7.1% growth rate, and gross capital formation, which fell 2.6% in Q4 2024, rose 6.7% in Q1 2025.
Central Bank General Manager Guillermo Avellan felt confident enough to affirm that, given these results, the official forecast of 2.8% growth for this year could be achieved, or even come in higher, at 3%. Such a forecast is feasible, even with a q/q average decrease of 1.28% in the coming quarters of this year.
The balance of trade between January and March showed a record high of $2288 million, which together with remittances of $1724 million, pushed the current account to 5.2% of GDP. The balance of trade from January and May grew to $3463 million, supporting an international reserves level of $8277 million as of the end of that period.
The significant activity recovery in Q1 and the expected higher growth for 2025 will, in part, offset the recession of 2024 and modest growth in 2022 and 2023. However, the labor sector did not respond vigorously in the period from January to May. Adequate employment is still low at 35.2%, although it is up 1.8% from May 2024. Underemployment is down 2.2%, and unemployment increased 0.6%, to 4.1%.
The fiscal sector and financing continue to pose a challenge to the government. With the new reforms, including focalization of the subsidy on diesel for tuna fishing companies, the adjustment of electricity tariffs for large consumers, and a new tax remission program, the government expects to raise additional $923 million in revenue to reduce the fiscal gap. These are good initiatives but they continue along the lines of “scraping the bottom of the barrel”. We believe the deficit of the general government budget will still end high, at around $3.7 billion in the absence of additional changes.
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