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Industrial
production contracts in August
In August,
industrial production contracted 8.8% over the same month last year, which
contrasted the 0.8% expansion registered in July. The August contraction
was broad-based, with 36 of 48 production categories losing ground over
the same month the year before. That said, the main drivers of the August
slowdown were strong decelerations in vehicle manufacturing and petroleum
production. As a result of the weak August reading, annual average growth
in industrial production continued to decline, falling from 3.4% in July
to 2.0%, which represented the slowest pace in nearly five years.
Consensus Forecast participants anticipate industrial production growth to
moderate to 1.9% in 2008, which is down 0.6 percentage points from last
month’s forecast. In 2009, the panel expects industrial production to
accelerate a notch to 2.5%.
Economic
growth to weaken substantially amid slower global demand
The
outlook for the short- and medium-term continues to deteriorate markedly.
The country has already been suffering from waning domestic demand, which
pushed economic growth to the slowest pace in five years during the second
quarter. Now, the effects of the turbulence in international financial
markets will also weaken the external sector. The country’s exports are
especially vulnerable as more than a third are sent to the United States,
which is heading towards a pronounced recession. In addition, falling
commodity prices will exacerbate the slowdown in exports. International
commodity prices have already experienced a huge correction in
anticipation of slowing demand in the world’s advanced economies. Prices
for oil, which accounts for one quarter of total exports, have fallen by
more than half since reaching a record price per barrel in July. Even
before the worst of the credit crunch took hold, exports had already begun
to show signs of slowing, expanding 27.6% annually in August, down from
the 44.2% annual growth observed in July. Amid the rapidly deteriorating
prospects of the global economy, Consensus Forecast panellists expect
exports growth to slow from an estimated 23.0% this year to 3.2% in 2009,
which would constitute the slowest pace since 2002.
Central Bank reduces growth projections
In
addition to slower external demand, the global economic downturn is likely
to take a toll on the domestic side of the economy, especially through the
rapid weakening of the Colombian peso.
In October, the exchange rate depreciated 7.8% in
nominal terms over the previous month to reach 2,356 pesos to the
US$, which is the weakest end-of-month level observed since September
2006.
The rapid
depreciation of the currency over the past few months will fuel already
high inflation, which remains persistent despite a tighter monetary policy
implemented by the Central Bank. The combination of higher interest rates
and high inflation will continue to dampen prospects for private
consumption. The financial sector crisis is also likely to affect the
country’s financing costs as global deleveraging and increased risk
aversion reduce the availability of external financing for emerging
economies, including Colombia. As a result, on 29 October, the Ministry
of Finance announced that the country would seek an emergency line of
credit of up to US$ 1.5 billion from commercial and multilateral lenders
to be used in the case of extreme need. In the same vein, the
Inter-American Development Bank (IADB) as well as the World Bank announced
that they are willing to provide the country with up to US$ 1.0 billion in
loans this year, if necessary. As a result of deteriorating economic
prospects, on both the international and domestic fronts on 7 November,
Central Bank President
José Uribe cut the
Bank’s economic outlook for this year and next. Currently, monetary
authorities expect that the economy will expand 3.5% this year, and 3.0%
in 2009,
which would represent the slowest rate of economic expansion in seven
years.
Consensus
Forecast panellists have recently revised their outlook for 2008 downward
to 3.8%, which is 0.3 percentage points below last month’s Consensus. For
next year, the panel is more optimistic than the Central Bank and has
revised their forecast down 0.5 percentage points to 3.3%.
Inflation
reaches seven-year high
In
October, consumer prices added 0.35% over the previous month, which
contrasted the 0.19% price decrease observed in September and overshot
market expectations which had prices remaining largely unchanged. The
primary drivers of the October reading were price increases in culture and
entertainment as well as in transport. Despite the subdued price increase
in October, annual headline inflation increased from 7.6% in September to
7.9%, which represented the highest rate in more than seven years. At the
current level, inflation well exceeds the upper end of the Central Bank’s
target range of 3.5% to 4.5%. On 24 October monetary authorities left the
benchmark interest rate unchanged at 10.00%. Monetary policy makers cited
increasing food costs, the depreciation of the peso, and a
deterioration in international financial markets as reasons for their
decision not to lower interest rates. That said, the Bank left the door
open for a more accommodative stance if needed. Although monetary
authorities did not reduce interest rates, they did announce a number of
measures to increase liquidity in the financial markets. The measures
included reducing the reserve requirements on savings and current deposits
as well as on time deposits inferior to 18 months. Furthermore, the
Central Bank also promised to supply additional liquidity to the market
via 14- and 30-day repo operations. Consensus
Forecast panellists expect inflation to further moderate to 6.9% by the
end of this year, which is up 0.1 percentage points from last month’s
estimate. Next year, panellists anticipate inflation to moderate to 5.2%,
which is within the Central Bank’s target range.
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