Economic activity continues strong, driven principally by healthy investment.  However, consumption remains subdued as high unemployment and tight consumer credit conditions undermine a solid rebound.  A strong pickup in economic growth is expected to remain absent as the export oriented manufacturing industry is likely to suffer from the downturn in global demand, particularly in the United States.

Industrial output growth healthy but slowing.  Recent data releases from the National Statistical Department (DANE) indicate that industrial production slowed to 3.1% in February over the same month last year, down from 6.3% in January.  The slowdown was prompted by lower beverage output (-28.6% year-over-year) due to a workers strike in one of the largest national brewing companies.  On the other hand, transport equipment and materials production expanded a strong 30.0% in February over February 2000.  Panellists, see the slowdown in February as temporary and expect industrial output to pick up again later this year.

Consumption remains sluggish.  Retail sales in February dropped 2.3% over the same month last year (0.98% excluding fuel and automobile sales).  The largest contractions were experienced in automobile related retail sales, where contractions exceeded 20% but also in personal care products (-5.0%) as well as textile and clothing sales (-4.9%).  Retail businesses claim that lagging demand and slow recovery in consumer credit remain key factors behind the lack of a rebound.  The April survey of the National Retailers Federation (FENALCO) indicates that business confidence in the retail sector improved in March.  The percentage of retailers who were optimistic that sales would improve in the next six months rose from 50% in February to 52% in March, while the percentage of pessimists dropped from 15% to 12%.  FENALCO notes further that sales should pick up in the second quarter as seasonal factors, such as tax season and required education spending, subside.  Furthermore, declining inflation and lower interest rates are expected to give a further push to consumption.  Nevertheless, consumption is likely to remain subdued this year, as high unemployment (20.0% in February) is likely to preclude a healthy expansion.  Consensus data indicate that consumption growth will be moderate this year but that government initiatives to lower unemployment to 18% this year should serve to drive a more notable recovery next year.

Investment growth continues strong.  February trade data indicate that investment as measured by capital good imports rose 4.1% over the same month last year, up from 1.3% in January.  By sector, capital good imports of transport equipment, construction and agriculture experienced the strongest increase.  Investment is likely to continue along the robust trajectory observed last year, when investment expanded 12.3%.  Panellists expect investment to be the main driver behind the expansion this year, with growth driven by improvements in domestic credit conditions and a favourable exchange rate.  The pick-up in domestic economic activity will serve to raise investment activity further next year.

According to preliminary numbers from the National Planning Department, the economy grew 2.7% in the first quarter, below the government’s target of 3.0%.  Nevertheless, government officials remain optimistic that this year’s 4.0% growth target will be met.  Concerns about the possible impact of diminished export growth, due to lower global demand, and the crowding out in capital markets of the private sector as a result of high government borrowing, have been identified by panellists as key factors working against the government's growth target.

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