OECD Economic Outlook, Volume 2026 Issue 1

GDP is projected to grow by 3.5% in 2026 and 3.4% in 2027. Domestic demand is expected to remain robust, supported by moderate gains in disposable income and employment and resilient investment despite increasing global uncertainty. External demand will weaken in 2026 due to a softer global growth outlook stemming from tighter financial conditions, diminishing confidence and uncertainties over trade policy. The evolving conflict in the Middle East poses downside risks through potential disruptions to energy and fertiliser supplies and key trade routes.

Strict implementation of the fiscal rule remains essential to contain public expenditure and ensure fiscal sustainability. With the economy near potential and domestic inflation pressures subdued, higher global commodity prices will push inflation back towards the 3% target. The monetary policy rate is expected to remain at 3.25%, in line with the natural rate. Opening and reforming the electricity market would accelerate investment, innovation and renewable energy adoption, supporting energy security.

GDP growth was strong in 2025, reaching 4.6%, and economic activity has remained robust in early 2026. The Monthly Index of Economic Activity increased by 4.7% year-on-year in March 2026, supported by construction, business services and manufacturing. Confidence indicators are also resilient. In February, consumer confidence was at its highest level since 2002, and business confidence in 2026Q1 was above its 2025 average. Labor market dynamics, however, remain mixed. Total employment continues to stagnate, with both employment and participation rates persistently below pre-pandemic levels. Formal employment continues to expand while informal employment keeps declining. The shift towards formal, higher‑productivity jobs is supporting productivity growth, partly offsetting the drag from lower labour force participation. In April, annual headline inflation remained negative at -1.6%, and core inflation turned negative, at -0.2%.

Rising energy prices are likely to raise headline inflation, with retail fuel prices rising by 15% year-on-year in May. Fuel supply, largely imported from the United States and primarily used for transportation, given that electricity generation is almost entirely from renewables, is projected to remain stable. The negative impact of a weaker global outlook on exports will be partially offset by the new 10% tariff on goods exports to the United States, which is five percentage points lower than the previous rate. The United States accounts for around 16.2% of total exports and 47% of goods exports.

The central bank lowered the monetary policy rate by 25 basis points to 3.25% in December 2025. Monetary policy is expected to remain broadly neutral going forward, with the policy rate kept unchanged amid elevated uncertainty and the need to balance inflation risks against a softening growth outlook. Fiscal consolidation is set to continue, as the fiscal rule constrains public expenditure and supports a positive primary balance, despite ongoing budget deficits driven by high debt-servicing costs. Elevated public debt underscores the importance of strict implementation of the fiscal rule.

GDP growth is projected at 3.5% in 2026 and 3.4% in 2027, held back by weaker net exports as the conflict in the Middle East dampens global demand. Increased uncertainty will soften investment in 2026, with public investment remaining constrained by limited fiscal space. Weaker employment creation, together with external inflationary pressure, will weigh on private consumption. Risks to the outlook are tilted to the downside. A pending US investigation could result in higher tariffs on US imports of medical devices, a key exporting sector for Costa Rica. A protracted conflict in the Middle East could significantly weaken external demand, raise energy and food commodity prices, and hit employment.

Against a backdrop of moderating growth and a weaker global outlook, reducing fiscal sustainability risks remains a key priority, and strict adherence to the fiscal rule continues to be essential. Fiscal space could be created by improving public spending efficiency through spending reviews and by broadening tax bases. To improve the business environment and support growth, Costa Rica needs to continue along its reform path and reduce stringent market regulations by streamlining regulatory bottlenecks and lowering barriers in services and network sectors. Opening the electricity market, by easing private and foreign investment restrictions and streamlining permits, would accelerate investment, diversify energy sources, and strengthen energy security.