Colombia - Economic Briefing December 2003

Economy Rebounds But Legislative Resistance On Reform Looms

Low interest rates and a recovery in key export markets are bolstering economic activity. However, the government is facing significant hurdles in the legislature on its tax reform initiative intended to compensate for the failure of the October referendum. The rising political opposition could threaten the well earned economic policy credentials of the government, as fiscal balances may deteriorate.

Economy exhibits strong rebound amid industrial sector growth spurt
Gross domestic product (GDP) grew 4.0% in the third quarter over the same quarter last year. The third quarter figure was almost double the growth pace observed in the second quarter and was well above market expectations. The government also revised GDP growth figures for first and second quarter to 3.8% (previous Q1: +4.3% year-on-year) and 2.4% (previous Q2: +2.2% yoy) respectively.

The key behind the healthy third quarter growth was the industrial sector, where activity rose 7.3% over the same quarter last year (Q2: +4.5% yoy), while services and agriculture registered more moderate growth rates of 4.2% (Q2: -0.4% yoy) and 4.7% (Q2: +3.7% yoy) respectively. Within industry, mining experienced the strongest expansion with 21.5% growth over the same quarter last year (Q2: 18.7% yoy). Stronger output in coal, gold, platinum, silver and nickel was only moderately affected by declines in oil and iron activity. Following mining as key driver of the industrial sector in the third quarter were construction and manufacturing, where activity rose 9.7% (Q2: +4.6% yoy) and 3.4% (Q2: +1.0% yoy) respectively.

Even though global demand and supply data have not yet been released, other data suggest that investment and exports were the key drivers behind the healthy third quarter expansion. Consumption, in contrast, seems to have remained subdued.

Exports and investment driving economic growth
Exports were up 11.1% in the third quarter over the same quarter last year, which represented a significant improvement when compared to the 3.4% expansion registered in the second quarter. The improvement came as a surprise, as one of Colombia’s key export destinations, Venezuela, continues to be mired in a deep recession. Similarly, import growth ballooned from a 0.9% contraction observed in the second quarter to a 10.6% expansion in the third. Capital goods accounted for the lion share of the surge in imports, as growth reached 17.0% in the third quarter over the same period last year (Q2: -2.5% yoy). The strong capital goods growth combined with the healthy growth in the construction sector indicates that firms have stepped up their investment activities. Intermediate goods imports rose 11.8% in the third quarter over the same period last year (Q2: -2.5% yoy), while consumer goods imports contracted -1.0% (Q2: -9.0% yoy).

Consumption subdued amid tight fiscal reins and less propitious setting for consumers
Even though consumption is showing some signs of improvement, current growth rates remain very subdued. According to DANE, retail sales dropped 0.1% in September over the same month last year. The September figure represented a worsening from the already meagre 0.3% and 1.3% expansions observed in July and August respectively. Private consumption continues to grow at a very moderate pace, despite the improved interest rate setting, as high unemployment (16.1% in September) and deteriorating real incomes thwart a more robust expansion. The combination of government efforts to maintain fiscal discipline by containing public spending and very modest private consumption is keeping a recovery at bay.

Outlook improves as economy performs better than expected
The healthy third quarter economic performance and recent data confirm a persistence of the favourable growth trajectory in the fourth quarter, which has prompted Consensus Forecast participants to revise the growth outlook for this year upward by a 0.1 percentage point to 2.9%, which is well above the government’s 2.0% estimate. The Central Bank’s current lax monetary policy should help rekindle private consumption and, thus, bolster domestic demand next year, as the current pace of investment expansion is unlikely to be sustainable. In fact, Consensus Forecast participants anticipate economic activity to accelerate further in 2004, with GDP expected to grow 3.4%, which is a 0.1 percentage point above last month’s figure.