Despite the favourable inflation outlook and declining interest rates, consumer confidence remains subdued.  As a result, the continued health growth pace anticipated for this year is likely to be export-driven, which will further boost industrial output.

Economic recovery confirmed.  According to preliminary data from the National Statistical Department (DANE), gross domestic product (GDP) expanded 2.8% in 2000, a solid rebound from the 4.3% GDP contraction experienced in 1999.  Growth was slightly below the government’s and the LatinFocus Consensus Forecast projection of 3.0%.  Key behind the expansion was the 3.6% growth in the private sector, while the public sector experienced a 1.2% contraction, as public expenditure was scaled back in line with targets agreed to with the International Monetary Fund (IMF).

When examined by sector, the strongest growth rates were registered in the manufacturing industry (+9.7%), agriculture (+5.3%) and the wholesale/retail trade sector (+5.3%).  On the downside, mining and quarrying activity declined 5.7%, public services dropped 1.1% and activity in financial services contracted 0.2%.  The data indicate that economic activity accelerated in the second half of last year.  Particularly strong fourth quarter growth was registered in agriculture, fishing and forestry, which grew 7.2% over the same quarter in 1999, while the construction and manufacturing sector activities experienced 6.8% and 6.1% growth for the same period. 

Investment healthy.  While aggregate demand and supply data is not yet available, recent data releases substantiate that investment and consumption are on the rebound.  Even though capital good imports declined 1.0% in December over the same month in 1999, several industries experienced a healthy investment rebound, namely construction and agriculture, where capital good imports grew 26.7% and 116.7% respectively.  According to this month’s Consensus Forecast, gross fixed investment grew strongly in 8.8% and is anticipated to continue to expand at a healthy pace this year. 

Consumption is also likely to have continued recovering.  According to DANE, national retail sales grew 3.1% (excluding fuels and automobile sales: +2.2%) last year.  Growth was strongest in sales of alcohol and tobacco (+18.8), automobile lubricants (+12.2%) and household appliances (+11.7%), while automobile and motorcycle sales registered the strongest contraction, down 15.8% compared to 1999.  This month’s Consensus Forecast expects consumption to have remained subdued for the year, however, as high unemployment (20.5% in January 2001) and tax hikes counteracted a more substantial pickup from the 3.0% contraction in 1999. 

Low consumer confidence is likely to continue to stifle consumption growth this year.  The March National Retailers Federation (FENALCO) survey of the retail sector confirms that consumption has remained subdued in the first two months of this year.  According to FENALCO, 43% of the businesses surveyed reported a decline in real retail sales in February, up from 31% the month before.  Accordingly, the number of retailers that reported improved sales dropped from 45% in January to 38% in February.  Simultaneously, the percentage of firms that expected improved retail sales in the next six months dropped from 52% in January to 50% in February.  In February, some 43% of retailers blame continued low domestic demand for the lack of an acceleration in sales, up from 39% in January.  Demand remained subdued largely as a result of lingering concerns about civil war violence but to a larger extent by tax hikes implemented last year (i.e. the 16% sales tax and the 0.3% financial transactions tax).  In addition, current credit card rates are prohibitively high at around 40% (with an annual inflation rate of 8%).  Panellists expect consumption to remain subdued this year with growth remaining very moderate.

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