Colombia - Economic Briefing February 2004

Domestic Demand Resurfacing but Stronger Currency Raises Concerns

The economy is emerging from the economic downturn early last year with robust growth rates.  Exports continue to experience strong growth amid the pick-up in the U.S. economy.  At the same time, domestic demand is gaining strength, as consumers and businesses alike take advantage of a stronger exchange rate, lower interest rates and easing credit conditions to step up activities.  The government, however, remains concerned about the strengthening exchange rate, which could hamper the export spurt, and has decided to adopt measures to stem further appreciation.

Government confirms healthy growth last year
According to preliminary figures from the National Planning Department (DNP), gross domestic product (GDP) expanded 3.5% last year, which was a notable improvement compared to the 2.0% expansion in 2002 and was 0.5 percentage points above market expectations.  The most recent indicators from the final quarter of last year show that domestic demand was beginning to experience a boost. 

Industry develops along favourable growth path amid improved domestic setting
According to the National Statistical Department (DANE), industrial production rose 4.8% in November over the same month the prior year.  Virtually all sub-sectors experienced positive growth, with steel and iron, non-iron metals and basic chemicals leading the way.  On the downside, the automotive, electrical machinery and equipment as well as printing materials sectors experienced downturns.  Companies continue to take advantage of the low interest rate setting and the easing of credit to step up output levels in order to benefit from the improved global economic environment and rising domestic demand.  

Retails sales blossom as economic developments favourable
Private consumption is experiencing a similar pickup in activity.  In November, retail sales rose a robust 4.5% over the same month the previous year.  The November figure was up from the already strong 3.9% growth observed in October.  Sales growth was particularly pronounced in durable consumer goods, as office equipment, household furniture and household appliance purchases experienced strong growth over the prior year.  Consumption continues to benefit form declining unemployment.  According to DANE, open unemployment dropped from 13.3% in November to 11.4% in December.  The December figure confirmed the trend of a gradual improvement in unemployment notable throughout most of last year and was well below the 15.6% unemployment rate registered in December of 2002.  The combination of lower unemployment and the improvement in real wages in the wake of the recent currency appreciation should continue to favour private consumption.  

Exports continue to be bolstered by improved global economy
Export growth continued to accelerate in November, as sales expanded 5.3% over the same month the previous year, up from 4.4% in October.  The acceleration of economic activity in the United States accounted for the lion share of the pick up in export growth, since demand from the Venezuelan economy, traditionally Colombia’s second biggest export destination, continued to slump amid the dire economic situation there.

Broadening of pick up in economic activity lifts outlook
Until the third quarter of the year, the external sector had provided the main push behind the economic rebound.  Data now show that the recovery took hold of domestic demand as well in the final quarter of the year.  Nevertheless, Consensus Forecast figure does not coincide with the DNP’s preliminary figure, as panellists expect GDP growth to have reached a lesser 3.1% in 2003.  This year, the government anticipates GDP to expand by 3.8%.  Consensus Forecast panellists are not as optimistic but appear to concur that growth with accelerate as a result of the more broad-based pick up in economic activity.  As a result, the economy is anticipated to expand 3.4%, which is unchanged from last month’s Consensus Forecast.