Colombia - Economic Briefing August 2004

Domestic Demand Robust but Export Growth Moderating

Economic growth continues to proceed along a strong trajectory driven by a notable improvement in the domestic economy.  Both consumption and investment are experiencing strong growth, which is moderating only very slowly, as the stronger comparison base of last year kicks in.  However, unless Central Bank intervention and government measures begin to stem the pronounced currency appreciation observed this year, the economy is unlikely to be able to fully take advantage of the current pickup in global demand.

Industrial production growth slows in second quarter but on healthy path
In May, industrial production rose 3.5% over the same month last year.  The May reading was slightly below the 3.7% growth rate observed the prior month and confirmed the gradually diminishing pace observed since February 2004.  Robust construction material, automotive vehicle and vehicle part output provided the main push behind the healthy expansion in industrial activity in May, while oil derivates and special machinery production experienced the strongest declines.  Consensus Forecast participants expect the current healthy expansion in industry to accelerate, bolstered by both strong domestic and international demand.  As a result, annual growth in output is seen as reaching 4.9%, which is up 0.2 percentage points from last month’s forecast.

Private consumption accelerates amid improved sentiment
Recent data suggest that consumption remains robust.  In May, retails sales rose 6.0% in real terms which was well above the 2.4% increase observed the prior month and points to a strong private consumption pickup in the second quarter.  A pronounced surge in furniture/household appliances, automobile and hardware sales, where sales rose in double digits, accounted for the strong May reading.  The June survey of the National Retailers Federation (Fenalco, Federación Nacional de Comerciantes) indicates that retail sales maintained their pace in June, as the percentage of businesses that experienced improved or the same level of sales rose from 70% in May to 73%.  Consensus Forecast participants expect the current expansion in private consumption to persist with annual growth seen at 4.2% for this year.

Outlook upgraded amid strong domestic demand surge
Consensus Forecast panellists have revised the outlook for this year upward, anticipating gross domestic product (GDP) to grow 3.9%, which is up 0.1 percentage point from last month.  The robust growth in domestic demand should serve as the backbone for ongoing strong growth rates through the end of the year, as exports may suffer from the strong appreciation in the exchange rate, despite the stronger expansion in global demand.  The current Consensus Forecast growth estimate is slightly below the government’s more optimistic 4.0% projection and remains well below the Central Bank’s upbeat estimate of 4.5%.  Next year, economic activity is anticipated to grow 3.7%.

Consumer prices moderate amid food price decline
In July, consumer prices dropped 0.03% over the previous month.  The July reading was well below the strong 0.60% increase observed the previous month and was also a notch below the 0.03% increase anticipated by the Consensus Forecast.  The strong decline in food prices (-0.70%) explained the first monthly decline in consumer prices since July of last year.  The food price drop was only partially offset by rising health (+0.34%) and housing (+0.27%) costs.  As a result of the July reading, the annual inflation rate rose only modestly from 6.1% in June to 6.2%. 

Consensus Forecast participants believe that the current persistence of the appreciation in the exchange rate is likely to keep a surge in consumer prices, resulting from the strong pickup in economic activity, at bay.  Accordingly, inflation is seen declining moderately in the second half to reach 5.9% by the end of the year, which is in line with the Central Bank’s inflation target range of 5% to 6% for this year.  Next year, inflation is anticipated to drop further, despite accelerated currency depreciation and only a modest decline in economic growth.  Consensus Forecast panellists expect annual inflation to moderate to 5.5%, which is on the upper end of monetary officials’ target range of 3.5% to 5.5% outlined for 2005.

Central Bank maintains monetary policy unchanged
The favourable inflation scenario and stable exchange rate has enabled the Central Bank to keep monetary policy unchanged over the past several months.  In July, the benchmark DTF interest rate remained virtually unchanged, dropping from 7.81% to 7.79%.  Nevertheless, monetary officials have indicated that the current international setting of rising interest rates – particularly in the United States – could prompt tightening in the near future.  Consensus Forecast participants anticipate the DTF rate to rise to 8.0% by the end of the year.  Next year, the Central Bank is expected to raise the benchmark rate further to 8.9%.