Colombia - Economic Briefing July 2003

Investment Drives Economic Rebound but Shadows over Export Sector

The low interest rate environment that has been maintained by monetary authorities since the second half of last year has helped spur a robust expansion in investment, as consumption remains subdued amid government efforts to maintain strict fiscal discipline and deteriorating real incomes. Furthermore, the export sector continues to be overshadowed by subdued economic growth in key export markets.

Robust investment lifts economy in first quarter
In June, the National Statistical Department (DANE) reported aggregate demand and supply data and confirmed the strong 3.8% annual growth rate for gross domestic product (GDP) in the first quarter reported earlier. The first quarter reading represents an improvement compared to the 2.1% growth observed in the final quarter of last year. The improvement was mainly due to a strengthening of investment whereas consumption and the external sector slumped. The low interest rate setting along with an improved credit environment prompted investment activity to expand by 33.2% in the first quarter over the same period last year. The first quarter investment figure represented an acceleration compared to the 26.4% rate observed in the final quarter 2002. The pick up in investment activity was particularly pronounced in transport equipment (68.2% year-on-year, Q4: 24.1% yoy), civil works projects (+25.6% yoy, Q4: -5.4% yoy) and machinery and equipment purchases (+11.6% yoy, Q4: +6.4% yoy).

Consumption, however, remained subdued, only moderately picking up the pace from 1.5% growth in the fourth quarter to a 1.8% expansion in the first quarter. Private consumption decelerated very moderately from 2.3% in the final quarter of last year to 2.0% in the first quarter, as benefits of lower interest rates were offset by a tight credit environment and a currency-induced deterioration in real incomes. Strong growth in durable consumer goods purchases was the key driving force behind the first quarter private consumption acceleration, as growth rose 6.7% over the same quarter last year. Public consumption rose from a 0.9% contraction in the fourth quarter of last year to 1.0%, as the government’s efforts to keep fiscal balances healthy forced renewed spending adjustments.

According to national accounts data, export growth remained in negative territory with a 4.1% contraction in the first quarter over the same quarter last year. The first quarter figure was an improvement when compared with the 5.2% drop observed in the final quarter of last year but shows that Colombian exporters continue to suffer the consequences of the economic downturns in its key export destination of the United States and Venezuela. Imports, which increased by 6.6% in the first quarter, were bolstered by strong capital goods purchases, as domestic firms stepped up investment activities.

The dire economic state-of-play in neighbouring Venezuela and less promising growth prospects in the United States is exerting downside pressure on the export sector. Nevertheless, if inflation continues to ease, monetary authorities may be encouraged to keep interest rates at their current lows. The more favourable monetary policy setting could serve to revive private consumption and thus bolster domestic demand as investment growth drops from the current unsustainable growth pattern. In fact, Consensus Forecast participants expect economic activity to remain healthy throughout the year with GDP expected to grow still above the government’s 2.0% estimate. The likelihood of a recovery in export markets should further bolster the economy next year, when growth is seen picking up the pace.