The economy contracted in real terms by 1.7% in 2017 owing to a larger than anticipated fall in both private and public demand, which increased exports and private investment were unable to offset. Declining tourism earnings and deteriorating terms of trade are set to persist into 2018. Moreover, the ruling by a Curaçao court in May 2018 that allows ConocoPhillips, a US oil firm, to seize local assets belonging to the Venezuelan state-owned oil company, PDVSA, including the Isla oil refinery, has increased the risk to economic output in 2018. The Isla refinery represents (directly and indirectly) around 10% of the island's annual GDP. Production stalled for a few days in August, which will register as a sizable cost in third-quarter output. However, operations were resumed and it is more likely than not that the government will sign on a new operator by end-2018.

As a result of a steep decline in manufacturing output and indications of declining domestic demand and consumption in 2018 so far (due to rising unemployment), we expect real GDP to contract by 0.6% in 2018, before a pick-up in investment and tourist activity support a weak recovery of 1% in 2019. The economy would suffer even more severely if a solution to the refinery's problems was not reached, with adverse impacts affecting both the diversity of the economy and overall growth. Other risks to our forecast would materialise if US or euro zone GDP growth were to fall below our current projections. Public spending on reconstruction following a destructive hurricane season in September 2017 will be supported by aid from the Dutch government and the EU. At the end of March the government received US$17m in EU funds for reconstruction projects, which will support investment growth following the completion of the construction of a large pier in 2017 and a hospital by the end of 2018.

Curaçao's small, open economy will remain highly sensitive to shifts in commodity prices, and the ebb and flow of international tourism demand. Rising unemployment also highlights the still-weak state of the economy. We expect growth to accelerate modestly in the short term, driven by further improvements in services activity (particularly in non-tourism areas, such as finance). This will drive new investment in services and construction growth in the medium term. A sharp recession in Venezuela caused overall stopover tourist arrivals to decline by 10% year on year in 2017; we expect a recovery in 2018-19 as arrivals from other countries increase. Indeed, half-year 2018 data indicate a reversal of the decline in tourism numbers, with stopover tourism rising by 2% year on year and cruise arrivals jumping by 28% year on year. The government recently came to an agreement with Airbnb, a US-based online short-term property rental marketplace, to promote its visibility abroad, and was involved in a financial bailout of the local airline, Insel, highlighting the strategic importance attached to the tourism industry.

A stronger recovery in 2019 will be prevented by the government's need to tighten fiscal policy during the forecast period. Minimal growth in real wages will constrain private consumption demand. Growth will be further hampered by tougher international financial regulation, which is acting as a brake on offshore services and company formation.