Colombia - Economic Briefing January 2004

Low Interest Rates and Higher Exports Propel Economy

The economy remains on a strong growth trajectory, as low interest rates, the improved inflationary setting and exchange rate appreciation provide for a more favourable economic state-of-play.  Domestic demand is exhibiting a strong growth spurt, while exports are increasingly benefiting from the pick up in key markets.  The political landscape and the government’s advancement on reforms will be key determinants of economic developments this year.

Government confirms strong third quarter growth
In December, the National Statistical Department (DANE) released aggregate demand and supply data for the third quarter.  The third quarter gross domestic product (GDP) was revised upward by 0.1 percentage point from the November preliminary release and showed economic activity expanding at 4.1% over the same quarter the previous year.  Thus, GDP in the third quarter expanded at almost double the growth pace observed in the second quarter.  

Investment the impetus behind healthy recovery in growth
Investment was the key driver behind the third quarter acceleration in economic growth, as activity rose a whopping 17.1% over the same quarter in 2002.  The strong third quarter reading was well above the already robust second quarter figure, which showed year-on-year investment growth of 7.1%.  Growth in investment activities was particularly pronounced in construction and machinery and equipment, where growth reached 22.6% (Q2: +19.1% yoy) and 21.8% (Q2: +10.5% yoy) over the third quarter 2002.  

Consumption growth modest but up amid lower interest rates and declining unemployment
Consumption growth remained unchanged at a very moderate 1.6% in the third quarter over the same quarter in 2002.  Even though private consumption growth accelerated from 1.8% in the second to 2.2% in the third quarter, public consumption dragged down overall consumption growth with a 0.1% contraction in activity over the same quarter the prior year.  Within private consumption, durable goods sales experienced the strongest growth, expanding 4.5% over the third quarter in 2002 (Q2: +4.0% yoy).  On the lower end, non-durable consumer goods registered the lowest growth of 1.0% (Q2: -1.4% yoy) for the same period.  

Export sector bolstered by non-traditional goods
Exports also experienced a strong expansion, as growth accelerated to 10.9% over the third quarter in 2002, up from a very moderate 1.2% pickup observed in the second quarter.  Non-traditional exports accounted for the lion share of the acceleration in the third quarter, particularly refined oil products and meat exports, which grew 42.7% and 31.5% respectively.  Within traditional exports, oil activity remained in recession with a 12.1% contraction (Q2: -20.7% yoy) but coffee experienced a strong 9.8% boost over the same quarter the prior year (Q2: 4.8 yoy).  Import growth also registered a strong acceleration with activity expanding 10.3% over the third quarter in the prior year, which was up from a meek 1.9% expansion in the second quarter.  Machinery and electricity supply goods and agricultural product imports provided the impetus behind the strong third quarter growth spurt with 30.3% and 18.9% expansions respectively.

Consumption likely to experience further acceleration
Businesses and consumers alike are taking advantage of a stronger exchange rate and low interest rates to expand their activities.  On the consumption side, declining unemployment is also bolstering activity.  More recent data show that consumption continued along a favourable growth trajectory in the final quarter of last year.  Retail sales rose 3.9% in October over the same month the previous year, which represented a strong rebound from the 0.1% decline in activity observed in the previous month.  Household appliance and furniture sales experienced the strongest growth of 22.4% yoy in October, followed by automotive vehicle and motorcycle sales (+22.0% yoy) and office equipment/furniture sales (14.2% yoy).  Trade data confirm the private consumption boost, as data show that consumer goods imports rose 7.1% in October over the same month in 2002, which was up from 5.3% in the previous month.  Declining unemployment, which dropped from 15.4% in October to 14.1%, is likely to provide further stimulus to the current private consumption pick up.