The downturn in global demand, weak commodity prices for Colombia’s key traditional exports and domestic guerrilla attacks on the oil infrastructure are undermining stronger growth for this year, as the export-led industrial production expansion is likely to decelerate.  At the same time, high unemployment and tight credit conditions continue to forestall a recovery in consumption. 

Consumption lagging.  In April, retail sales rose a modest 1.1% over the same month last year.  This represents a slowdown compared to the 2.3% and 2.2% growth rates observed in February and March.  The most recent April retail survey of the National Retailers Federation (FENALCO) confirms the slowdown.  Of the total businesses surveyed 48% claimed that real retail sales dropped when compared with the same month last year, compared to 36% in the March survey.  Lagging demand, principally the result of high unemployment (18.1% in May), and declining consumer credit remain key factors behind the slump.  Business confidence also deteriorated in a rapid turnaround.  The share of businesses that were optimistic about a consumption pickup in the next six months dropped from 51% in March to 43% in April, while the proportion of outright pessimists rose from 13% to 16% with the balance not expecting any changes from their current situation.  This month, participants have revised total consumption growth forecasts for this year downward, which the figure still remains modestly above the 1.5% expansion last year.  Growth forecasts for consumption next year have also been revised downwards. 

Industrial performance remains strong.  Industry remains the driving force behind the current economic expansion.  The National Statistical Department (DANE) reports that industrial production grew 5.2% in April over the same month last year, which was up from 4.2% in March but still remains well below the double digit growth rates observed throughout most of last year, due to the higher comparison base.  Robust growth in chemical products (+21.6%) and transport equipment materials (+29.8%) drove industry.  On the downside, petroleum derivatives and non-metal mineral production dropped 18.4% and 3.2% respectively over April 2000.  However, April trade data confirm that investment in industry remained strong with capital goods imports to that sector up 41.5% over the same month last year.  The downturn in global demand, particularly in the United States, and moderating international oil prices are likely to drive down growth, which is expected to slow this year from the 10.5% growth registered in 2000. 

Growth outlook deteriorating.  The DANE revised its first quarter annual growth figure downward from 1.8% to 1.7%, owing to more subdued consumption and slowing export growth.  In addition, the government has announced that it may revise the current growth target for this year from 3.8% to below 3%.  The weak first quarter reading has prompted panellists to undertake revisions to their growth forecasts for this year.  This month, Consensus Forecast participants have lowered growth forecasts by 0.5 percentage points from last month.  Nevertheless, both consumption and investment are expected to experience strong accelerations next year.

Congress approves regional transfer cap and puts fiscal balances on track.  On 19 June, Congress approved the fiscal reform bill (Articles 356 and 357 of the 1991 Constitution).  The so-called “Fiscal Responsibility” bill was an essential fiscal reform measure included in the agreement with the International Monetary Fund (IMF) under the terms of a US$ 2.7 billion stand-by loan.  The new law puts a cap on central government transfers to departments and municipalities, which to date have been tied to growth in the central government’s current income and last year received 46.5% of the federal income.  The central government spending on regional transfers will now be limited to inflation plus 2% growth for the period of 2002-2005 and inflation plus 2.5% growth for 2006-2008.  The current year will be used as the base with total transfers estimated at US$ 4.2 billion (5.2% of GDP). 

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