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Growth comes in higher than
anticipated
In the second quarter of this year, gross domestic product (GDP) expanded
2.2% compared to the same period in 2001. The second quarter data was well
above market expectations of 1.4% and represented a substantial
improvement over the first quarter figure of 0.5% growth. On a seasonally
adjusted basis, the growth rate for the second quarter was 1.7% over the
first quarter of this year. Compared to the 0.9% contraction in the first
quarter, this marks a notable swing upward.
Construction, agriculture and financial services drove economic growth in
the second quarter with growth rates of 8.7%, 5.3% and 3.2% respectively.
The strong pick up in the labour intensive construction sector, which was
up from just 3.5% growth registered in the first quarter, was particularly
welcomed by the government, which is currently battling against adverse
employment conditions. In July, unemployment rose to 18.3% from 18.0% in
June. Historically low interest rates are helping the current rebound in
construction activity. The only sector to experience a contraction was
mining, where activity dropped 8.1% over the same quarter last year. Key
behind the contraction was a notable decline in coal, metals and natural
gas output, while oil and construction materials production developed
favourably.
Despite the favourable second quarter developments, the government has
revised its growth forecast downward to 1.2%-1.5% this year from 2.0%
announced earlier. Officials growing increasingly concerned that high
unemployment will keep domestic demand constrained, while export growth is
likely to be hampered by recession in neighbouring Venezuela and slower
than anticipated growth of the US economy. Furthermore, a persistence of
further currency weakening and the concomitant pass-through on domestic
prices may force the Central Bank to adopt a tighter monetary policy,
which could forestall the current economic rebound. On the lower end, the
new official forecast is now in line with the Consensus, which sees
economic growth slowing growth this year, which unchanged from last month.
Government misses IMF fiscal target
for first time
On 28 August, the finance ministry reported that the public sector deficit
in the first half of the year exceeded the target agreed to with the
International Monetary Fund (IMF) under the terms of the existing,
three-year US$ 2.8 billion stand-by agreement. Officials also announced
that the lower pace of economic recovery this year is likely to reduce tax
revenues substantially. As a result, the government expects to overshoot
the current public sector deficit target of 2.6% of GDP agreed to with the
IMF. The finance ministry anticipates the fiscal deficit to come closer to
3.5% of GDP, or even deteriorate further to 4.1% of GDP, if fiscal
adjustments are not approved by the legislature. The government is
currently pressuring the legislature to approve tax reform proposals (a
broadening of the tax base of the value-added tax and lower income-tax
exemptions) and spending cuts (suspending payment of extra bonuses to
local public sector employees and tax rebates to exporters) to balance
fiscal accounts. Furthermore, the government hopes to conclude
negotiations with the IMF for the renewal of the stand-by loan agreement
by the end of September. The government is banking on an easing of this
year’s fiscal deficit target as the implementation of election campaign
promises of heightened military and social spending are likely to impede
any efforts to cut back government outlays further. Consensus Forecast
participants have maintained their fiscal deficit forecast. Finance
authorities expect successful tax and pension reforms to help bring down
the fiscal deficit next year to 3.0% of GDP, optimism that is not shared
by panellists.
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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