Colombia is gearing up for the second round of the presidential race to be held on 17 June, in which right-wing candidate Iván Duque will face off left-wing contender Gustavo Petro. Duque, a business-friendly candidate, is still the favorite to clinch the presidency. On the economic front, the recovery from the oil price shock of 2014–2015 is underway. The latest release shows GDP expanded 2.2% year-on-year in the first quarter, an acceleration from the previous quarter. Average growth in both retail sales and industrial production rebounded in Q1. Retail sales picked up throughout the quarter against a steady rise in consumer confidence and low levels of inflation. Exports continued growing at a strong rate in the first quarter, albeit losing some pace from the fourth quarter. Going into Q2, consumer confidence entered positive territory for the first time in over two years in April. • The economy is expected to speed up this year, with growth being buoyed in the medium-term by expansions in oil exploration activities, which should benefit from higher oil prices. That said, reliance on oil exports will leave the economy exposed to the same kinds of external shocks that triggered a slowdown in 2015–2016. Investment in the non-oil sector will therefore be essential to boosting growth. FocusEconomics panelists expect GDP to grow 2.5% in 2018, which is unchanged from last month’s forecast, and 3.0% in 2019. • Inflation inched up to 3.2% in May from 3.1% in April, remaining within the Central Bank’s target range of 3.0% plus or minus 1.0%. FocusEconomics panelists expect inflation to end 2018 at 3.3% and 2019 also at 3.3%. • At its latest meeting held on 27 April, Colombia’s Central Bank (Banco de la República, BanRep) unanimously voted to cut the benchmark interest rate by 25 basis points from 4.50% to 4.25%. This rate is the lowest since July 2014 as the Bank continues its easing cycle in a bid to accelerate growth. On average, our panelists expect further easing this year and see the policy interest rate ending 2018 at 4.21%. They see it ending 2019 at 4.70%. • On 8 June, the Colombian peso ended the day at 2,859 per USD, marking a strengthening of 0.5% over the same day in May. Rising oil prices and a brighter economic outlook have fueled upbeat sentiment for the currency. The peso has also benefitted from carry trade and is expected to be one of the best performing emerging market currencies this year. FocusEconomics analysts forecast the peso ending 2018 at 2,915 per USD and 2019 at 2,947 per USD. POLITICS | Colombia heads to a second-round presidential run-off, with Duque expected to win Following the first round of the presidential vote held on 27 May, in which no one candidate captured more than half of the ballot, the two leading candidates from the race—Iván Duque of the right-wing Democratic Centre (Centro Democratico) and Gustavo Petro of the left-wing Colombia Humana movement (Humana Colombia)—will face off in the second round set to take place on 17 June. Duque is expected to clinch the presidency in the final vote, having sustained a lead in the first round as well as in the polls. Given his business-friendly stance, a victory for Duque would likely create a more conducive environment for a faster pace of economic expansion while also preserving macroeconomic stability. Although the two candidates agree on certain points, such as slowing the pace of trade liberalization and not signing more free trade agreements that have failed to yield the intended benefits, their overall economic plans sit in stark contrast. Duque’s agenda is business friendly and includes measures to simplify the tax system for businesses and lower corporate taxes. Moreover, Duque is expected to undertake an orthodox approach to managing the economy and has signaled a reduction in public spending with a view to maintaining fiscal neutrality from higher growth. Petro, who is the first candidate from the far left to reach the second round of the presidential race in years, has meanwhile campaigned on diversifying the economy away from the oil sector and extractive industries to alternative products. Among Petro’s other key policy proposals are restructuring spending, instituting a tax overhaul and taxing non-productive land, as well as focusing on public investment. He has proposed higher corporate taxes and increased taxes for high-income earners to fund additional expenditure in health and education. While the measures would help improve social conditions and reduce inequality, a looser fiscal stance would worsen the fiscal imbalances and steer the economy onto a more unsustainable debt path. Petro’s unpopularity among investors would likely generate more economic uncertainty and increase volatility in financial assets. Whoever wins the election will be tasked with reversing the tide of lackluster growth that has set in since oil prices fell sharply in 2014–2015. Austerity measures introduced in the 2016 and 2017 budgets have also dented growth, with the economy expanding at the slowest pace in eight years last year. A slew of more upbeat data from the outset of the year suggests a turning point for the economy, however, with the recovery expected to pick up on the back of rising oil production amid higher oil prices, along with an upturn in demand supported by lower inflation and interest rate cuts. All in all, the race still looks set to be Duque’s to lose. His victory, which is anticipated by the markets, would likely bode well for economic growth, attract more investment and help sustain macroeconomic stability. Among the key challenges for the new president will be addressing Colombia’s subdued growth while consolidating fiscal imbalances, and the implementation of the peace deal with FARC. Panelists participating in the LatinFocus Consensus Forecast project that GDP will expand 2.5% in 2018, which is unchanged from last month’s forecast. For 2019, panelists expect GDP will grow 3.0%. REAL SECTOR | Economic recovery picks up in the first quarter According to the latest GDP data released by the National Statistical Institute (DANE) on 22 May, the economy grew 2.2% in the first quarter, picking up from a revised 1.8% figure in the final quarter of 2017 (previously reported: +1.6% year-on-year). A pick-up in private consumption and government spending drove the upturn. Meanwhile, economic growth in seasonallyadjusted, quarter-on-quarter terms rose to 0.7% in Q1, up from 0.5% in Q4. An important note is that this data release has changed the series base from 2005 to 2015, which means that past growth figures have been revised under the new methodology. Overall, domestic demand expanded at a weaker pace in Q1, growing 1.3% year-on-year in the quarter compared to 2.1% in Q4. The downturn was due to a sharp contraction in total investment, which offset accelerations in both private consumption and government spending. Total investment fell 3.9% in the quarter after rising 0.6% in Q4. On the other hand, household consumption grew 2.5% in annual terms amid lower level of inflation, following an expansion of 1.2% in Q4. Government consumption soared 7.3% in the first quarter, up from 4.8% in the previous quarter. Fixed investment data has yet to be released. While exports contracted again in the first quarter, they did so at a softer pace. Exports fell 0.5% in Q1, following a more sizeable contraction of 3.7% in Q4. Imports also fell, with the rate of decline moderating as well. In Q1, imports dropped 1.7% after contracting 3.8% in the previous quarter. The overall contribution of the external sector to growth was positive, as imports contracted more sharply than exports. While the economic recovery is underway and is expected to strengthen on the back of higher oil prices in the coming quarters, a high fiscal deficit continues to pose risks to long-term fiscal sustainability. REAL SECTOR | Industrial production swings to contraction in March According to data released by Colombia’s National Administrative Department (DANE) on 11 May, industrial output contracted 1.4% over the same month of the previous year in March, contrasting a 1.5% year-on-year expansion in February. Looking at a breakdown of the data, 26 out of the 39 industrial activities recorded a decline, while the remaining 13 registered an expansion. Among the notable drivers of the downturn were the categories of manufacture of non-metallic mineral products; manufacture of pharmaceutical products, medicinal chemicals; and manufacture of soaps and detergents, perfumes and toilet preparations. Industrial activities that showed a pick-up included the preparation of sugar and panela; preparation of beverages; and coking, oil refining, and fuel blending. Annual average growth in industrial production dropped down to minus 0.7% in March from minus 0.2% in February. Panelists surveyed for this month’s LatinFocus report expect industrial production to expand 2.3% in 2018, which is up 0.1 percentage points from last month’s forecast. For 2019, the panel expects industrial production to increase 2.5%. REAL SECTOR | PMI drops in May from April’s 19-month high The seasonally-adjusted Davivienda manufacturing Purchasing Managers Index (PMI) dropped to 51.1 in May after rising to a 19-month high of 52.1 in April. The index moved closer to the critical 50-point threshold that separates expansion from contraction in manufacturing output. Business conditions in the manufacturing sector continued to improve, with sustained growth in order books, production, employment and input purchasing, although the rate of expansion moderated in all cases due to uncertainty arising from the presidential election and weaker-than-expected sales. Output rose at the slowest pace in three months and the expansion was driven by new business from both domestic and external markets. Goods producers, however, remained optimistic about growth prospects, with sentiment climbing to a survey-record high. Backlogs of work continued to decline as firm hired additional workers, although the rate of job creation weakened in the month. While input prices moderated in May, output charges rose at the swiftest stride since last September as some firms passed on the higher burden of cost adjustment onto consumers. Sentiment among manufacturers was at the highest level in the survey history on expectations that market conditions will improve after the elections; firms cited export opportunities, new collections and business expansion plans as the main potential growth drivers. Commenting on May’s PMI reading, Andrés Langebaek Rueda, Chief Economist Bolivar Group at Davivienda, stated: “…everything seems to indicate that manufacturing activity will continue to expand, that the slowdown observed in May corresponds to a temporary phenomenon and that activity will continue with a good dynamic in the coming months.” OUTLOOK | Consumer sentiment enters optimistic territory for the first time in almost two-and-a-half years The Fedesarollo consumer confidence index climbed from minus 3.2 points in March to 1.5 points in April. This marked the first time since November 2015 that the indicator has crossed the zero-point threshold separating optimism from pessimism among consumers. Four out of the five main sub-components of the index registered an upturn in sentiment. Consumers’ perceptions on their future personal economic situation improved, along with their views on the general economic situation in the next 12 months. Moreover, consumers’ assessment on the country’s economic conditions over the next year swung from negative into positive terrain. Consumers also held more favorable views on purchasing big-ticket items such as furniture and appliances. On the downside, consumers were more pessimistic about their present financial situation compared to a year ago. LatinFocus Consensus Forecast participants expect private consumption to expand 2.5% in 2018, which is unchanged from last month’s forecast. For 2019, the panel expects private consumption to increase 3.0%. MONETARY SECTOR | Inflation edges up in May According to the National Department of Administrative Statistics (DANE), consumer prices increased 0.25% over the previous month in May, a softer upturn compared to the 0.46% rise in April. Three out of the nine subcomponents recorded sharper price increases from the previous month, two recorded softer price increases, one came in flat, and two registered a fall in prices. Prices for entertainment increased the most, while prices for clothing and communications declined. Inflation ticked up to 3.2% in May from 3.1% in April. Consequently, it remained within the Central Bank’s target band of 3.0% plus or minus 1.0%. Core consumer prices—which exclude volatile items including fresh food and fruit—ticked up 0.27% in May, following a revised 0.22% increase in April (previously reported: 0.0%). Meanwhile, core inflation rose to 3.8% in May after dropping to a revised 3.7% in April (previously reported: 3.8%). Panelists participating in the LatinFocus Consensus Forecast expect that inflation will end 2018 at 3.3%, which is unchanged from last month’s forecast. For 2019, the panel also expects inflation to end the year at 3.3%. EXTERNAL SECTOR | Export growth soars in April According to the National Department of Administrative Statistics (DANE), the annual pace of expansion in exports rocketed to 38.5% in April, up from a meagre 1.4% in March. All three main product groups recorded robust growth, rising at a double-digit rate. Exports of farming, food and beverages rebounded, while exports of fuels and products of extractive industries, and exports of manufacturing output accelerated markedly. In March—the most recent month for which data is available—imports contracted 5.3% year-on-year, which contrasted a 0.1% upturn in February. All three main import groups, covering farming, fuels and manufactured goods, registered a decline. In annual terms, the trade deficit shrunk to USD 384.0 million in March from USD 638.8 million from the same month of the previous year. March’s deficit was smaller than the USD 494.2 million deficit recorded in February Panelists participating in the LatinFocus Consensus Forecast expect that exports will grow 11.1%, reaching USD 41.9 billion in 2018. Exports are seen rising 5.3% to USD 44.2 billion in 2019.
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