Economy experiencing cautious recovery.  According to the National Planning Ministry (DNP), economic growth reached 2.6% in the first quarter over the same quarter last year, the first positive reading  since the second quarter of 1998.  The key driver behind the recuperation is the strong performance of the industrial sector.  According to the National Statistical Institute (DANE), industrial production grew by 10.5% in March compared to the same month last year.  The industrial sectors that showed the strongest rebound were:  oil derivatives, transport equipment, non-ferrous metals, chemicals and textiles. 

According to the March industry survey of the National Industrial Association (ANDI), the perception of the current business climate has improved.  While in March 1999, 82.3% of the businessmen qualified the current situation of their company as unfavourable, this figure dropped to 58.3% in the same month this year.  Similarly, expectations of the immediate future have converted into a more optimistic sentiment.  In March, 36.9% of the businesses anticipated that conditions in industry would improve in the coming months, up from just 18.0% last year.  Lagging demand and a lack of working capital remain the key obstacles to further improvement in the Colombian business environment.  Consensus panellists anticipate the healthy growth in industrial production to continue this year.  Annual industrial production is anticipated to grow by 6.3% this year and to continue developing favourably in 2001 with a 6.2% expansion.

The recovery in industrial activity is a promising indication that economic activity is beginning to rebound.  However, the export-led industrial recovery is not sufficient to guarantee that economic growth will proceed along a favourable trajectory, particularly since 1999 is a very weak comparison base year and there are no clear indications that consumption is recovering.  Consumer demand remains constrained in part by tight credit, which is unlikely to abate in the near future, due to the gradual recovery of the banking system.  Additionally, the incipient economic recovery in the first quarter has not yet begun to make a dent in unemployment levels.  In the fist quarter of this year, unemployment was at 20.2%, up from 18.0% at the end of last year.  The persistence of high unemployment will serve as a further impediment to cosumption growth this year.

Notwithstanding the healthy improvement in industrial activity, the Consensus Forecast for economic growth dropped to 2.6% for this year from 2.7% last month, which puts Colombia at the bottom of the ranking among the seven economies surveyed in our forecast.  Rising interest rates, a weak banking sector and political uncertainty are likely to continue to cloud growth prospects.  Accordingly, the Consensus has also lowered the growth estimate for 2001 from 4.0% last month to 3.8% in this month's survey.

Currency depreciation continues.  The peso continued depreciating in May amid rising inflationary expectations brought about by lingering political uncertainty over the government's ability to reign in the fiscal deficit this year.  Inflation inched up only 0.5% in May, but still remains at an annualised 10.0%.  Prices are expected to continue to rise above the Central Bank’s target rate in the coming months.  Consensus Forecast panellist have raised their projections consistently in the past three months from 9.9% 90 days ago to 10.4% in this month's survey but still remain only slightly above the Central Bank's target of 10.0%. 

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