Colombia - Economic Briefing April 2004

Economy Set for Further Recovery

The stronger than expected economic growth registered last year promises to carry over, as domestic demand, in particular investment, is likely to experience further robust growth.  A stronger currency, low interest rates, declining unemployment and moderating inflation, promise to give an additional push to economic activity this year.

Government revises fourth quarter economic growth upward with aggregate demand figures
On 31 March, the National Statistical Department (DANE) released aggregate demand and supply data, and revised the annual gross domestic product (GDP) growth figure of 3.6% for 2003 released on 27 February upward to 3.7%.  The more robust than originally calculated fourth quarter growth (+4.5% vs. original 4.3%) figure and stronger first quarter numbers (4.1% vs. original 3.9%) accounted for the upward revision.

Investment drives economic growth
Domestic demand experienced a strong upward surge at the end of the year, as declining unemployment, a more favourable interest rate setting and a stronger exchange rate provided a strong push to the domestic economy.  The 5.4% growth in domestic demand over the same quarter the previous year was up from a 4.3% expansion in the third quarter.  The acceleration was due to higher consumption.  Investment, on the other hand, slowed down compared to the very strong 16.0% expansion observed in the third quarter but remained robust at 13.7%.  Machinery and equipment as well as construction output accounted for the lion share of investment output growth, while civil works projects investment expanded more moderately and transport equipment and agriculture output actually declined.  Total consumption experienced a strong boost with growth reaching 3.6% in the fourth quarter over the same period the previous year (Q3: +1.9% yoy).  Both an increase in household and public consumption drove up activity.  Within private consumption, durable consumer goods experienced a noteworthy expansion, as growth more than tripled from the already robust 5.5% pace in the third quarter to 18.1% in the final quarter of the year.  Despite a pickup in global demand and international commodity prices, the export engine moderated notably in the final quarter of the year with growth slowing from 10.2% year-on-year in the third quarter to just 3.9% in the fourth.  Imports also moderated but remained very robust with 8.6% growth (Q3: +10.7% yoy) amid continued strong investment growth and rising consumption.

Outlook favourable amid signs for persistence of economic rebound
This year, the continued strengthening in the exchange rate, a more subdued inflationary setting and declining unemployment should work in favour of a further consolidation of the current growth recovery.  As a result, Consensus Forecast participants have revised their growth estimates upwards from last month’s 3.5% to 3.7%.  Participants expect the current strong growth trajectory to persist through next year with GDP expanding by 3.6%.  However, the current growth story is likely to remain contingent upon further government progress on economic and fiscal reform – a key determinant of the current confidence boost.

Inflation well behaved despite the pickup in domestic demand
In March, consumer prices rose 0.98%, which was down from the 1.20% increase observed in the previous month and was in line with market expectations.  Moderate increases in clothing, housing and recreation prices accounted for the more restrained March reading, while only health costs experienced a strong upward surge.  As a result of the March figure, annual inflation dropped to 6.2% from 6.3% in February.  The recent exchange rate strengthening is likely to provide a favourable backdrop for a more subdued inflationary setting.  However, the acceleration in domestic demand growth will begin to exert some upward pressure on prices this year. Nevertheless, Consensus Forecast participants see annual inflation continuing its downward trend to reach 5.8% by the end of the year, which is unchanged from last month’s estimate and within the annual inflation target range of 5% to 6% established by monetary authorities for 2004.  Furthermore, Consensus Forecast participants see inflation dropping next year to 5.4%, which is on the upper limit of the Central Bank target of 3.5% to 5.5%.

Central Bank maintains benchmark rate low
The moderating inflation trend and the stronger currency are giving monetary authorities the leeway to keep monetary policy lax.  In March, the benchmark DTF rate remained virtually unchanged, rising just 5 basis points to 7.8%.  The low interest rate setting is likely to sustain the current pickup in domestic demand for the time being.  However, Consensus Forecast participants do not expect the current low interest rate setting to persist throughout 2004 with the DTF rate seen rising to 8._% by the end of the year.  More accelerated currency depreciation next year and continued healthy economic growth are likely to prompt the Central Bank to tighten the monetary reins further, as the benchmark interest rate is expected to rise to 9.1% by the end of 2005.