The pace of contraction in GDP narrowed to 2.6% y/y in Q1, following a 4.1% fall in the previous quarter amid strong growth in public investment and goods exports.

Prospects for Q2 have deteriorated

The surge in Covid cases, slow vaccine rollout, and new restrictions will hit confidence and delay the anticipated recovery in household consumption, particularly of services. We also expect the planned opening of key tourist destinations to quarantine-free travel to be delayed. We expect GDP growth to grow 2.8% this year.

GDP contracted by 2.6% y/y in Q1, in line with our forecast although better than consensus. Sequential growth slowed to 0.2% on the quarter (seasonally adjusted) with the re-imposition of stringent containment measures in January weighing on household spending and business investment.

Household spending contracted 0.4% q/q in Q1, 1.2% lower than a year ago

Indeed, household spending contracted 0.4% q/q in Q1, to be 1.2% lower than a year ago. Private investment, notably in structures, also fell on the quarter although some pay back was expected after Q4’s strong rebound.

Encouragingly, public investment surged 23% q/q with infrastructure spending up nearly 30% y/y. This raises hopes that public spending will turn more supportive following delays. Externally, total exports rose 8% y/y amid strong external demand and a smaller contraction in service exports. However, with imports also recording strong growth, net exports subtracted 8ppt from Q1’s y/y growth.

Prospects for Q2 have deteriorated as social distancing measures were reimposed in April to curb soaring Covid infections. Most of the country is now classified as Red Zones. This still allows businesses outside of entertainment to operate, albeit at reduced capacity. We see an increased risk of a stricter nationwide lockdown given elevated case numbers.

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Oxford Economics

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