Economic growth is slowing amid lower global demand and poor performance by the country’s key export products, coffee and oil.  Oil production has come to a virtual standstill as a result of persistent guerrilla attacks, while coffee prices remain at historic lows.  In addition, growth in the manufacturing industry, a strong force behind last year’s healthy growth, is threatening to stall, as consumption continues to suffer from a higher tax burden, higher unemployment and tighter credit conditions.

Economic growth slowing more than expected.  The National Statistical Department (DANE) reported that GDP growth slowed further in the second quarter to 1.6% from 1.7% in the first quarter of this year.  Growth in the second quarter came in below the Consensus Forecast estimate of 2.1%.  Furthermore, the low second quarter reading brought growth in the first half to just 1.6%.  The adverse conditions of Colombia’s faced by Colombia traditional export products were key behind the first half decline.  Oil production came to a virtual standstill as a result of persistent guerrilla attacks and coffee prices remained at historic lows. 

Despite the slowdown, all major sectors remained in positive territory throughout the second quarter.  Electricity, gas and water output registered the strongest growth over the same quarter last year (+3.1%), followed by transport and communications (+2.3%) and commerce (+2.1%).  On the downside, construction activity remained flat, while manufacturing output rose a meek 0.4% and financial services increased 0.7%.  Particularly disconcerting for unemployment are the signs that the labour intensive construction industry again seems to have fallen into a slump after a brief respite in the fourth quarter of last year.

Even though DANE has not released aggregate demand and supply data, recent indicators suggest that consumption remains subdued and investment is slowing.  A solid recovery in consumption has remained absent so far this year principally due to continued high unemployment (17.8% in July) and an increased tax burden.  Nevertheless, the July National Retailers Federation (FENALCO) survey of the retail sector confirms that consumption has picked up since April.  According to FENALCO, 41% of the businesses surveyed reported an increase in real retail sales in June, up from 40% the month before and 30% in April; 37% observed a decrease in June retail sales with the balance experiencing no change.  The improvement can be attributed principally to the so-called ‘Efecto Copa América’, which served to temporarily boost consumption.  However, business sentiment has worsened.  The percentage of firms that expect improved retail sales in the next six months dropped from 52% in the June survey to 46% in July.  Some 61% of retailers surveyed blamed the continued slump in domestic demand for the lack of acceleration in sales.

The slowdown in the second quarter forced the National Planning Department (DNP) to acknowledge that growth would come in below the 3.8% expected at the beginning of the year and to lower the official GDP growth target to 2.4%.  The official consumption and investment growth forecasts were lowered from 2.4% and 12.5% to 1.5% and 11.3% respectively.  While the Consensus figure for growth in consumption actually exceeds the government’s forecast, panellists do not share the optimism about investment, which is expected to grow at a lesser rate this year.  Thus, the Consensus for GDP growth this year is also somewhat below the government’s target.   The government remains optimistic that the more competitive exchange rate and a pickup in global demand, particularly in the United States, will give the economy the necessary boost to grow 4.0% next year.  Participants are more pessimistic than the government. 

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Colombia.  For more details please click here.

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