Colombia - Economic Briefing December 2004

Economy Experiences Abrupt Slowdown

Economic activity has unexpectedly slowed, as investment has moderated from previously unsustainable growth levels.  Nevertheless, private consumption growth remains robust and the export sector is humming along amid strong global demand and high commodity prices.  Low interest rates, declining unemployment and an improved credit setting should rekindle economic growth next year.

Growth slows more than expected in third quarter
In the third quarter, gross domestic product (GDP) expanded 2.4% over the same quarter last year.   The third quarter reading was well below the 4.3% expansion observed in the prior quarter and was also less than the 3.8% expansion expected by Consensus Forecast participants.  A quarter-on-quarter comparison confirms the slowdown, as economic activity actually dropped 0.14% in seasonally adjusted terms over the second quarter compared to a 0.79% expansion observed the previous quarter.

Construction remains backbone of activity
The construction sector maintained its resilience in the third quarter, as activity rose 7.7% over the same quarter last year.  Robust housing construction was the key driver behind the third quarter growth, as activity expanded 31.4% over the same quarter last year.  However, a notable 28.6% decline in civil works projects held back the sector from a more pronounced expansion.  Similarly, activity in the financial sector rose 5.0% in the third quarter over the same quarter last year.  The robust 20.4% growth pace observed in financial intermediation (Q2 04: - 19.9% year-on-year) accounted for the strong expansion in the financial service industry.  Manufacturing activity decelerated but still remained on a strong expansion trajectory with growth reaching 4.8% in the third quarter.  Despite the fact that most sectors – with the exception of agriculture and mining – remained in positive growth territory, the third quarter exhibited a clear deceleration in economic activity.  In fact, only public and financial services experienced an acceleration in economic activity compared to growth figures in the prior quarter.

Private consumption remains strong
The National Statistical Department (DANE) is scheduled to release aggregate demand and supply data later this month.  Nevertheless, retail sales indicate that private consumption is likely to have remained strong in the third quarter.  In September, real retail sales rose 6.5% over the same month last year.  The September reading was well ahead of the prior month’s 4.1% figure and confirmed that the deceleration observed in activity is unlikely to have been caused by weaker private consumption.  In the second quarter, private consumption growth reached 3.6% over the same quarter last year.  Strong growth in vehicle (+28.5% yoy) and clothing (+11.1% yoy) sales boosted activity notably in September.  With the exception of office equipment and print product sales, all other sub-categories of the retail sector remained in positive growth territory.

Retail sales suggest strong consumption in final quarter
A low interest rate environment, rising real incomes and declining unemployment are likely to continue to bolster activity in the retail sector.  According to the October survey of the National Retailers Federation (Fenalco, Federación Nacional de Comerciantes), the percentage of businesses that experienced improved or the same level of sales remained unchanged over September at 71%.  In addition, expectations for activity in the next six months improved with 95% of businesses anticipating improved or the same level of sales.

Investment slows from unsustainable high levels
Trade data indicate that investment is likely to have experienced a strong slowdown in the final month of the third quarter.  Capital goods imports grew a paltry 4.9% in September, which represented a pronounced slowdown from the 23.4% expansion observed the prior month.  In fact, the September reading represented the first month with single digit year-on-year growth since February.  As a result, the annual growth rate of capital goods imports dropped from 19.9% in the second to 13.1% in the third quarter.

Export growth engine remains sturdy
Trade data further indicate that strong export growth was sustained in the third quarter.  In September, exports rose 39.5% over the same month last year.  The September reading was ahead of the already sound 34.6% expansion observed the prior month.  The healthy pace in traditional exports growth (+63.4% yoy) accounted for the strong export expansion, as non-traditional exports grew at a lesser pace (+23.6% yoy).  Within traditional exports, the strong expansion in sales of oil and its derivatives explain the September boost.  Non-traditional exports profited from pronounced sales of vehicles, plastics and clothing.