Colombia - Economic Briefing July 2004

Economic Growth Strong but Moderating

The rapid acceleration in economic activity observed in the second half of last year appears to have abated.  Conditions for continued healthy economic growth, however, remain good, as interest rates are low, unemployment is declining and real incomes are bolstered by a stronger exchange rate.  Nevertheless, sustained economic expansion at high levels depends on a recovery of the export engine, which is showing signs of a slowdown.

Robust growth confirmed for first quarter
On 29 June, the National Statistical Department (DANE) released the final first quarter gross domestic product (GDP) figures, which confirmed a robust economic expansion.  In fact, DANE revised the first quarter GDP growth figure upward from the 3.8% reported on 2 June to 4.1%.  The reading was thus more in line with the government’s preliminary 4.2% estimate released in May.  In the fourth quarter, GDP had expanded by 4.9%.  DANE also revised the growth figure for last year upward from 3.7% to 3.9%, amid a more pronounced acceleration in activity at the end of the year.

Domestic demand slows amid investment moderation
Domestic demand grew at a healthy 4.8% in the first quarter over the same quarter last year.  However, activity actually slowed from the more robust 5.4% pace observed in the previous quarter.  The investment expansion observed in the second half of last year, when growth reached 16.4% and 14.3% in the third and fourth quarter respectively, moderated to 9.0% in the first quarter.  The moderation of investment in machinery and equipment to a 12.0% pace (Q4 03: +26.2% year-on-year) and the decline in civil works investments by 41.6% over the same quarter last year (Q4 03: +0.4% yoy) accounted for the deceleration.  In contrast, construction and housing investment more than doubled the pace, as growth doubled from 25.9% in the final quarter of last year to 58.0%, the fourth consecutive quarterly acceleration.

Consumption picks up amid decline in unemployment
Unlike investment, consumption activity picked up in the first quarter with growth accelerating from 3.6% in the fourth quarter of last year to 4.0%.  The pronounced pickup in private consumption, where activity rose from 3.4% in the fourth quarter to 4.6% in the first quarter of this year, was the key driver behind the overall acceleration in consumption growth.  Increased durable consumer goods (+18.9% yoy) and semi-durable consumer goods purchases accounted for the push behind private consumption.  Public consumption, on the other hand, actually slowed from the 4.1% pace in the fourth quarter of 2003 to a 2.2% expansion in the first quarter.

Exports dwindle despite pickup in key export destinations
Exports continued to decelerate in the first quarter, with growth moderating from 6.2% in the final quarter of last year to just 1.1% over the same quarter last year.  The majority of key export sectors decelerated with food and coal exports experiencing the strongest slowdowns, while major traditional exports of oil and coffee continued to see improvement.  The deceleration in exports comes as a surprise, given the overall recovery in the global economy and the strong rebound in key export destinations, such as the United States and Venezuela in particular.  The slowdown may reflect the fact that Colombian exports are facing a loss in competitiveness in light of the continued appreciation in the currency observed since the end of last year.  Furthermore, import growth outpaced the export expansion with a 5.3% expansion in the first quarter, which was also down from the more pronounced 9.0% growth rate observed in the previous quarter.  The deceleration reflected the moderation observed in investment, as capital goods experienced the lion share of the slowdown over the prior quarter.

Outlook revised downward despite promising fundamentals
Consensus Forecast panellists expect the current pace of economic activity to moderate throughout the year but to remain robust.  As a result, economic growth is anticipated to reach 3.8%, which is down 0.1 percentage points from last month’s Consensus Forecast estimate.  Next year, economic growth is likely to decelerate further, with the annual GDP expansion seen as reaching 3.7%.