Colombia - Economic Briefing May 2004

Growth Benefits from Increased Domestic Demand and Strong External Sector

The robust growth momentum observed in the second half of last year appears to have carried over to this year, as low interest rates, a stronger currency and easing credit conditions are spurring on domestic demand.  Meanwhile, the external sector is benefiting from stronger global demand and higher commodity prices.  However, the government’s efforts to pass a constitutional reform to allow for presidential re-election is likely to stall progress on economic policy reforms considered essential to sustain healthy economic growth rates.

Growth remains robust in first half amid exports surge and healthy domestic demand
On 20 April, the government planning department announced that gross the domestic product (GDP) is likely to have grown 4.2% in the first quarter over the same quarter last year.  The government figure was a notch below the robust 4.5% estimate released by the Central Bank earlier.  Thus, economic activity remained very robust, moderating only slightly from the 4.4% growth pace observed in the final quarter of last year.  Even though the preliminary data is likely to undergo some revision before the release of the official figure at the end this month, recent indicators confirm that first quarter growth remained strong.

Private consumption strong amid low interest rate setting
According to the National Statistical Department (DANE), real national retail sales rose 7.1% in February over the same month last year.  The February figure was below the 8.9% growth experience in January but confirmed that private consumption is likely to have been strong in the first quarter.  Healthy growth in household appliances and furniture (+21.8% year-on-year), vehicle parts and accessories (+20.4 yoy) and hardware goods (+18.3% yoy) drove the overall pace of real retail sales in February.  The only retail sectors to experience contractions over the prior year were books/publishing (-8.7% yoy), automotive vehicle lubricants (-5.4% yoy) and office furniture/equipment (-0.2% yoy).  The retail sector continues to benefit from the current low interest rate environment, easing credit conditions and the real income boost associated with the strong currency appreciation.

Industry on robust expansion path amid export drive and rising domestic demand
Similarly, industrial output is proceeding along a robust growth trajectory.  In February, industrial production was up 6.1% over the same month last year.  The February figure contrasted with the 0.3% contraction observed in January and resumed the trend of strong output growth observed since September of last year.  The strongest growth within the industrial sub-sectors was registered in construction inputs, household appliances and basic metals, while clothing and general machinery output dropped.  Industry continues to benefit from the low interest rate setting and a revival in domestic demand, which is serving to augment the already healthy boost received from the improved export setting.

The most recent trade data indicate that exports continued along a strong expansion path with total sales rising 28.1% in January over the same month last year, compared to a 1.2% decline in imports.  The January export figure represented a strong acceleration compared to the prior month, when exports had grown 5.8%.  Traditional exports accounted for the lion share of the January export expansion, as coal and coffee exports received a strong boost from increased global demand.  Total traditional exports expanded 32.2% in January over the same period last year, which was well ahead of the healthy 21.3% growth in non-traditional exports.  

Government raises economic outlook
In light of the strong first quarter economic performance, the government decided to revise this year’s growth estimate upward from 3.8% to 4.0% in April.  Officials believe that improved investor sentiment towards the country will boost private investment further, particularly in industry, mining and agriculture.  The new government estimate is now 0.2 percentage points above the Consensus Forecast estimate but remains below the Central Bank’s optimistic 4.5% growth scenario for this year.  Next year, the Consensus Forecast sees growth as decelerating only moderately to reach 3.6%.