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Investment
experiences strong push in 2002 amid favourable interest rate setting
Data for aggregate demand and supply, released by the National Statistical
Institute (DANE), confirmed the previously reported 1.9% GDP growth rate
for 2002. The release also showed that investment helped sustain the
economy in the final quarter of the year. Investment activity rose 23.4%
in the fourth quarter over the same quarter in 2001, a further
acceleration from the already vigorous 14.6% growth rate observed in the
third quarter. In the fourth quarter, investment experienced its strongest
push from the construction and transport equipment sectors. Construction
investment increased at an annual rate 25.6% and transport equipment grew
25.7% over the same period the previous year. On the other hand, civil
works investment declined among the sub-sectors, with activity dropping
5.2% for the same period, as many government projects were cancelled amid
the government spending cuts adopted throughout the year. In general,
investment profited from the low interest rate environment, as businesses
seized the opportunity to bolster investment activities.
Consumption drops amid currency
depreciation
The less propitious exchange rate setting contributed to deterioration in
real incomes, which together with lingering high unemployment levels
(17.9% average in 2002) and the government’s fiscal adjustment, served to
undermine consumption. Consumption rose just 1.1% in the fourth quarter
over the same quarter the prior year, which was down from the 2.1%
expansion observed in the third quarter. The slowdown was prompted
principally by a 1.1% drop in government consumption (Q3: +1.1%), amid the
more austere fiscal setting, while household consumption actually rose
1.8% (Q3: +2.5%).
Participants expect investment to remain the backbone of the economic
rebound this year but growth is expected to slow from last year’s 5.2%
pace to 4.1%. Consumption is anticipated to remain subdued and only to
accelerate a notch from 1.8% in 2002 to reach 1.9% this year.
Nevertheless, gross domestic product (GDP) growth should pick up amid a
stronger external sector, which is now above the government’s 2.0%
forecast.
Inflation continues along
accelerated path amid higher fuel prices
In March, consumer prices rose 1.05%, which was up from 1.1% in the prior
month. The March figure exceeded market expectations of 0.8%. As a result,
the annual inflation rate rose from 7.2% in February to 7.6%, which is now
well above the 5% to 6% target range set by the Central Bank for this year
and exceeded the 6.1% first quarter goal agreed to under the terms of the
US$ 2.1 billion stand-by agreement with the International Monetary Fund (IMF).
Furthermore, producer price developments indicate that underlying
inflationary pressures persist. In March, producer prices increased 0.9%,
which represented an improvement from the 1.3% rate observed in February.
Nevertheless, annual producer price inflation continued to accelerate,
rising from 11.1% in February to 11.5% in March. The current inflationary
spike is the result of strong exchange rate depreciation in 2002, which
has only gradually eased in the first three months of this year. Thanks to
Central Bank intervention, the currency depreciation came to a virtual
standstill in March, with the currency ending at 2,958 pesos to the US$, a
mere 0.1% weaker in nominal terms than at its close in February. The March
rate represented a significant improvement over the weakening observed in
the prior four months, when the currency lost a total 6.7% of its nominal
value. In addition to the currency depreciation, the spike in oil prices
has exerted pressures on domestic fuel prices. Central Bank authorities
warn that adverse weather conditions, higher fuel prices and the
anticipated acceleration in economic activity could serve to sustain
current price pressures. Even though prices typically experience a strong
surge in the first quarter of the year, which gives way to more moderate
consumer price increases throughout the year, monetary authorities will
have to contain monthly increases at 0.28% on average throughout the end
of the year in order to meet their target for 2003. Participants remain
optimistic about the Central Bank’s commitment to tighten monetary policy
in order to comply with this year’s inflation objective. The Consensus
Forecast sees monetary authorities only moderately overshooting the
target. According to participants, inflation should come down next year.
The current Consensus figure is set just above the upper end of the
Central Bank target of 3.5% to 5.5% set for next year. |
