Consumer price increases remained contained last year with and came in below the Central Bank target, despite the pick up in economic activity.  Meanwhile, the government’s progress on tax reform and prospects for advancement on further fiscal reform promise to put the economy on more solid footing in the longer term.

Economy growth recovered.  Towards the end of last year, the Colombian economy showed clear signs that recovery from the 4.3% contraction in 1999 was consolidating.  A more competitive exchange rate and favourable international conditions served to substantially boost Colombian exports, driving a strong recovery in industry but also in non-traditional exports, while simultaneously consumption began rebounding, despite continued high unemployment (19.7% in Q4 2000).

According to the National Statistical Department (DANE), industrial output growth continued to strengthen in October with the expansion reaching 10.1% over the same month in 1999.  The strongest growth sectors were transport equipment, paper and chemical products industries, which experienced 49.3%, 18.1% and 16.3% growth respectively.  Even though industrial production still remains solidly in double digits, the October data confirms that growth rates are slowing.  After reaching a peak 15.8% growth rate in August over the same month in 1999, monthly industrial output in September dropped 1.4% and rose only 1.0% in October, which brought down the annual rate to 10.9% and 10.1% in each month respectively.  This month’s Consensus Forecast shows that industrial production is likely to have slowed further in the second half of the year.  Panellists expect further growth moderation this year but remain optimistic about the prospects for industry.

According to the Consensus Forecast, economic growth in 2000 was on target with the government’s estimate of 3.0%.  The slowdown in the GDP growth rate in the third quarter indicates that the momentum in the rebound from the 1999 recession is slowing.  The gradual recuperation in the construction industry this year – the sector finally registered growth (+2.8%) in the third quarter after 10 months of contraction - should help to lower unemployment and prompt a further consumption rebound.  This month’s Consensus Forecast sees growth continuing well below the current 4.0% government estimate.

Inflation on target in 2000.  Consumer prices increased 0.47% in December.  As a result, annual inflation dropped to 8.75% - the lowest level since January 1971 and well below the 10.0% Central Bank target.  Transportation and culture/recreation costs experienced the largest annual increases of 16.3% and 11.7% respectively.  DANE attributes the increase primarily to higher oil prices, which served to substantially hike domestic gasoline prices.  On the downside, clothing and housing costs rose more moderately by 3.6% and 4.9%.  The containment of housing costs can be primarily attributed to sluggish domestic demand, as unemployment remained high throughout the year.  The economic pick up next year should put some upward pressure on prices with panellists projecting an annual rate well above the Central Bank’s 8.0% target.  As a result of inflationary pressure, interest rates are expected to rise.

Peso weakens in line with expectations.  A combination of lingering political uncertainty surrounding the peace process and lack of confidence in the government’s ability to contain fiscal imbalances prompted the peso to weaken substantially last year and close at 2,229 to the US$ at the end of December, which represents a nominal depreciation of 15.9% over the end of 1999.   The annual depreciation was on target with Consensus Forecast expectations at the beginning of last year.  For this year, the government has secured its financing with support from the multilateral organisations and is perceived to be on more solid fiscal footing, which has served to boost investor confidence and is likely to stabilize the peso this year.

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