Colombia - Economic Briefing October 2004

 Domestic Demand Complements External Sector Expansion

The robust growth of recent months is persisting as domestic demand picks up further steam to complement the expansion in the external sector.  Low interest rates, declining unemployment and increased confidence in the economy are providing a strong stimulus to further economic expansion.  Meanwhile, growth is also helping bolster fiscal accounts, which remain on target with IMF objectives.

Healthy domestic demand drives economic expansion
More detailed national accounts data for the second quarter confirmed that gross domestic product (GDP) expanded 4.3% over the same quarter last year.  Domestic demand accelerated from 4.4% growth in the first quarter to 6.2%, as a strong surge in investment (Q2: +18.1% year-on-year; Q1: +5.4% yoy) compensated for a slowdown in consumption (Q2: + 3.3% yoy, Q1: +4.0% yoy).  Exports expanded at a 9.0% pace (Q1: +5.6% yoy), despite the less competitive exchange rate.  Imports, in contrast, more than doubled the growth rhythm over the first quarter to 17.1% growth.

Consumption on strong expansion trajectory
Retail sales indicate that the strong private consumption expansion observed in the first half of the year has carried over the second.  In July, real retail sales were up 6.0% over the same month last year.  The July figure was below the 7.5% expansion observed in June but confirmed the consistently strong readings registered throughout most of the year.  Strong growth in household furniture/appliances; tobacco and alcoholic beverages; and clothing sales provided the key push behind the healthy reading.  Declining unemployment (11.7% in November, down from 12.4% in October) and low interest rates are providing the necessary confidence for increased private consumption.

Investment remains on robust growth track
Trade data indicate that investment activity continues to expand at a strong pace.  In July, capital goods imports rose 11.9% over the same month last year, which was down from the 12.8% expansion the prior month but confirmed double-digit expansion pace observed since March.  As a result of the strong July reading, the annual variation in accumulated, 12-month capital goods imports reached 8.8%.

Positive outlook sustained amid strong fundamentals
The resilient pace observed in the first half of the year has prompted Consensus Forecast participants to maintain a positive outlook for the remainder of the year.  Nevertheless, the pace is anticipated to moderate, as the strong comparison base of last year begins to kick in.  In fact, GDP growth is expected to decelerate to 3.8% in the third and 3.9% in the fourth quarter.  As a result, full year growth is anticipated to reach 4.0%, which up 0.1 percentage points from last month’s Consensus Forecast estimate.  Next year, economic growth is expected to moderate only slightly to 3.8%, which is 0.1 percentage point above last month’s figure.