Colombia - Economic Briefing September 2004

Economic Activity Proceeds Long Healthy Growth Trajectory

The economy is currently being bolstered not only by strong export growth but increasingly by a healthy recovery in domestic demand.  Low interest rates, declining unemployment and contained inflation are helping foster a more favourable domestic setting.  However, the persistently strong exchange rate is likely to exert downside pressure on the exports and should moderate the current economic expansion.

Economy picks up further speed in second quarter
In the second quarter, gross domestic product (GDP) grew 4.3% over the same quarter last year, which was 0.3 percentage points above market expectations in last month’s Consensus Forecast.  The second quarter figure represented an acceleration compared to the prior quarter, when activity rose 4.1%, and continues the trend to higher growth observed since the third quarter of last year.  A quarter-on-quarter comparison implies a slightly slower pace than suggested by the annual data but confirmed the upward trend, as activity rose 0.79% in seasonally adjusted terms, which was up from 0.44% the prior quarter. 

Construction, manufacturing and commerce drive economy
Even though the growth rate in construction slowed by 2.9 percentage points compared to the first quarter, the expansion remained very robust at 9.3% over the same quarter last year.  Housing construction was the key driver behind the second quarter growth, as activity expanded a robust 29.4% over the same quarter last year.  However, a notable 22.0% decline in civil works projects held back the sector from a more robust expansion.  Aside from financial services, all other sectors exhibited healthy growth rates, particularly manufacturing and commerce, where activity rose by 6.3% and 5.3% respectively over the same quarter last year.

Private consumption benefits from low interest rates and declining unemployment
Even though aggregate demand and supply data have not been released yet, preliminary data suggest that private consumption continued along a strong growth trajectory.  According to the National Statistical Institute (DANE), real retail sales rose 7.5% in June over the same month last year, which was up from the already robust 6.0% growth rate observed in the previous month.  Booming household goods (+29.4% year-on-year) and electric appliance sales (+26.2% yoy) were the key drivers behind the strong June expansion.  As a result of the strong reading, retail sales were up 5.3% in the second quarter over the same quarter last year.  Declining unemployment is a key factor behind the current robust private consumption rebound.    In July, unemployment dropped again to 12.9% from 14.1% in June.  Furthermore, the current unemployment rate is now well below last year’s 14.3% level.

Investment growth slowing amid stronger comparison base last year
The most recent trade data indicate that investment is likely to have slowed in June.  Capital goods imports experienced a pronounced 12.8% expansion over the same month last year.  However, the June figure was well below the 26.2% and 20.1% growth rates observed in April and May respectively.  Strong demand for construction materials was the key driver behind the June increase, which was followed by transport equipment imports.  Nevertheless, capital goods imports for the second quarter were up 19.8% over the same quarter last year, an improvement from the -2.9% decline in the first quarter.

Export engine humming along, as rising domestic demand drives up imports
Export growth remained very robust in the second quarter with growth reaching 20.3% over the same quarter last year, more than twice the pace recorded in the first quarter.  Imports increased at an even faster 23.6% clip, as the strong domestic economy almost tripled demand for imported goods compared to the first quarter.  Nevertheless, the annual trade balance has narrowed from a US$ 341 million deficit to a US$ 114 million shortfall, as domestic demand drove up import growth notably.