Colombia - Economic Briefing December  2001

Economic Activity Declining but Credit Setting Improves (continued)

Investment growth continues strong

September trade data indicate that investment growth remains strong.  Capital good imports rose 18.6% over the same month last year, up from 16.6% in August.  By sector, imports of transport equipment and construction materials experienced the strongest increases of 64.8% and 35.5% respectively over September last year.  Even though investment is unlikely to grow at the same pace as last year, the more favourable interest rate environment appears to be encouraging firms to build up their production capacity. 

Panellists expect investment to be the main driver behind the expansion this year, with growth reaching 9.5%.  Improved credit conditions and prospects for a pick-up in domestic economic activity will serve to keep investment activity healthy this year, with growth reaching 6.9%.  Hampering a more favourable growth trajectory is the anticipated slump in global and regional demand, which will serve to dampen export growth. 

Even though the government remains optimistic that this year’s growth target of 2.4% will be met, the Consensus figure does not bear this out.  Concerns about the impact of lower export growth continue to cloud economic prospects.  Forecasts for next year have also been revised downward 0.2 percentage points.

Inflation at lowest level years

Consumer prices inched up 0.12% in November over the previous month, down from 0.19% in October.  The November figure lowered the annual inflation rate to 7.8%, which was the lowest annual rate observed since December 1970 and bodes well for the Central Bank objective of keeping inflation below 8.0% this year. 

Price pressure has remained absent for most of the year with the Central Bank complying with all of its quarterly inflation targets agreed to with the IMF at the beginning of the year.  A relatively stable exchange rate combined with lower food and oil prices has kept inflationary expectations contained. 

Nevertheless, panellists expect consumer prices to jump owing to holiday spending and anticipate the year-end inflation rate to exceed the target at 8.2%.  Salary negotiations for next year, which begin on 10 December, will influence the Central Bank’s ability to meet its 6% inflation target.  Currently the major unions are demanding an increase of 9.5% (consisting of 8% inflation this year and an addition 1.5% for productivity increases), while the government would prefer to keep the increase at 6%.  Inflationary pressures resulting from unfavourable negotiations are likely to increase price pressures next year.

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

For five-year forecasts, please click here.