The deceleration in economic activity reflected in recent economic releases and prospects for a slowdown in industry, resulting from the downturn in global demand, has prompted the government to revise its GDP forecast downward.  In the meantime, price pressures remain contained and the more favourable inflationary expectations should enable the Central Bank to ease monetary policy.

Government lowers growth forecast.  In July, the National Planning Department (DNP) lowered its growth forecast for this year from 3.8% to 2.4% as a result of concerns about the downturn in global demand and sluggish growth in domestic demand.  The worsening growth prospects prompted the DNP also to lower the growth forecast for next year from 4.5% to 4.0%.  Consensus Forecast participants continue to factor the economic slowdown into their forecasts for this year.  This year's GDP forecast is 0.2 percentage points below the forecast for last month and 0.7 percentage points below the forecast 90 days ago.  The growth pace is likely to pick up moderately next year.

Recent economic indicators confirm the government’s assessment that economic activity is decelerating.  In May, industrial production grew 3.6% over the same month last year, which was down from a 6.0% expansion observed in April.  Petrochemical production and transport equipment materials output registered strong growth of 56.5% and 35.0% respectively over May 2000.  On the downside, chemical products and beverage production dropped 22.3% and 10.0% respectively over the same period.  Consensus Forecast data reflect the recent deceleration in industrial growth, as participants have again revised downward their forecasts for this year.  Growth forecasts for next year remain healthy but have also experienced a downward revision, as panellists expect the global downturn to impact further Colombia’s external sector. 

National retail sales growth remained moderate in May, rising 2.7% (+2.0% excluding fuels and automobile sales) over the same month last year, up from 1.1% registered in April.  The strongest growth was registered in office furniture/equipment, (+35.0% year-over-year) and automobile/motorcycle sales (+14.3% yoy), whereas pharmaceutical and clothing/textile sales experienced contractions of 5.0% and 2.3% respectively.  The retail sector continues to suffer the consequences of high unemployment, which was down from 20.3% in the first half of last year to 18.6% this year but still remains the highest in Latin America.

Annual inflation on target.  Consumer prices increased 0.1% in July over June, which raised the annual inflation rate to 8.1% from 7.9% in June.  Culture/recreation and health prices led the monthly increase, rising 0.64% and 0.52% respectively.  Food and transport costs were at the bottom end of the monthly consumer price increase with a 0.21% contraction and a 0.12% up-tick over June respectively.  Panellists still remain sceptical about the Central Bank’s ability to reach the 8% inflation target this year, but have, nevertheless, lowered their annual forecasts.  The improved inflationary outlook also has prompted participants to lower the interest rate forecast.  Panellists have become more confident that the Central Bank will have to tighten to a lesser degree than anticipated last month as evidenced by the downward revision of the interest rate forecast by 0.3 percentage in this month’s Consensus Forecast over last month.  As a result, this month’s Consensus Forecast expects the benchmark DTF interest rate to rise only moderately from the current level by the end of this year.  The favourable inflationary trend is expected to persist next year, as participants expect annual inflation to moderate further.  Furthermore, as a result the Central Bank will be enabled to ease monetary policy with the interest rate for next year forecast to be 0.4 percentage points below last month’s figure.

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