Análisis Económico de Colombia, por Focus Economics

Colombia’s economy continued to recover in Q3, albeit at a gradual pace. The external sector received a boost in September on the back of a strong acceleration in oil and refinery exports. A pick-up in energy demand and higher oil prices are helping the oil sector begin to stabilize

after its near collapse in 2016. Moreover, favorable weather conditions translated into higher output in the agricultural sector, especially in coffee production; agricultural exports grew by a double-digit rate in September.

Furthermore, the trade deficit narrowed in annual terms in August, underpinned by a contraction in imports. On 18 October, Colombia’s congress approved a USD 80 billion budget for 2018, which is only marginally larger than the 2017 budget. The government is attempting to implement austerity measures to reduce spending in the face of sluggish growth and to cut the fiscal deficit in 2018. It also announced it will not issue any more international bonds as it tries to curb its foreign debt.

 Economic growth should accelerate heading into 2018, carried by stronger domestic demand, which should firm up from higher private consumption and private investment. The former is on the rise thanks to lower inflation and more stable unemployment, while the latter will benefit from projects in civil works and the mining sector. FocusEconomics panelists expect

GDP to grow 2.6% in 2018, which is down 0.1 percentage points from last month’s forecast, and 3.1% in 2019.

 Inflation edged up to 4.1% in October from 4.0% in September. On 27 October, the Central Bank cut the policy rate from 5.25% to 5.00%. Our panelists expect inflation to end 2018 at 3.4% and 2019 at 3.2%.

REAL SECTOR | Industrial production contracts in August Industrial production contracted 3.1% on a yearly basis in August, following July’s strong 6.3% expansion (previously reported: +6.2% year-on-year), continuing the trend of volatility in production growth since the outset of the year. According to Colombia’s National Administrative Department of Statistics (DANE), the contraction was driven by a decline in production across a broad spectrum of sectors, with the greatest contraction in motor vehicle and trailer production.

Due to the contraction, annual average growth in industrial production fell from 1.4% in July to 0.3% in August. FocusEconomics panelists surveyed for this month’s LatinFocus report

expect industrial production to expand 2.3% in 2018, which is unchanged from last month’s forecast. For 2019, the panel expects industrial production to increase 2.8%.

Panelists expect GDP to grow 2.6% in 2018, which is down 0.1 percentage points from last month´s forecast. Panelists forecast GDP to accelerate to 3.1% in 2019.

OUTLOOK | Consumer confidence improves in September The Fedesarrollo consumer confidence index increased from minus 15.9 points in August to minus 10.3 points in September. Despite ameliorating, the reading still lies below the 0-point threshold that separates pessimism from

optimism among consumers.

The improvement in consumer confidence in September was the result of less pessimism among households regarding the current state and the outlook of the economy. Households were also less pessimistic about their current personal economic situations compared to last year. Conversely, consumers were less optimistic about their future personal economic situations.

Furthermore, consumers were less willing to purchase big-ticket durable goods such as home appliances.

Panelists participating in the LatinFocus Consensus Forecast expect private consumption to expand 2.6% in 2018, which is down 0.1 percentage points from last month’s forecast. The panel expects private consumption to increase 3.0% in 2019.

MONETARY SECTOR | Inflation rises for a third time in October According to the National Department of Administrative Statistics (DANE), consumer prices rose 0.02% from the previous month in October following an increase of 0.04% in monthly terms in September. The slight uptick in

consumer prices was driven by higher prices for recreation and housing, offsetting lower prices for food and clothing.

Inflation inched up to 4.1% in October from 4.0% in September, the third rise in inflation after a full year of consecutive drops. October’s uptick led inflation to rise above the upper bound of the Central Bank’s target band of 3.0% plus or minus 1.0 percentage point for the first time since May and was widely in line with market expectations of 4.1% inflation. October’s inflation print came in shortly after the Central Bank decided to cut the benchmark interest rate 25 basis points on 27 October.

In September, the latest month for which data is available, core consumer prices—which exclude volatile items including fresh foods and fuels—rose 0.11%, falling marginally from 0.13% in August. Meanwhile, core inflation fell to 4.9% in September from 5.0% in August.

Panelists participating in the LatinFocus Consensus Forecast expect that inflation will end 2018 at 3.4%, which is down 0.1 percentage points from last month’s forecast. For 2019, the panel expects inflation to end the year at 3.2%.

MONETARY SECTOR | BanRep unexpectedly cuts interest rate in October

On 27 October, the Board of Directors of Colombia’s Central Bank, BanRep, decided to cut the benchmark interest rate 25 basis points from 5.25% to 5.00%, returning to easing following a pause in rate cuts last month. The decision surprised market analysts who had widely expected BankRep to

stand pat in October. Five members voted to cut the interest rate, while the other two members voted to keep the rate unchanged. Bank noted lower-than-expected inflation as the primary reason for the

reduction in the policy rate. According to the Bank, inflation over the course of the previous three months came in below market expectations, despite an uptick in September, and core inflation continued its descent, prompting the

Bank to reduce its inflation forecasts for this year and 2018. BanRep now expects inflation and core inflation to fall closer to its target rate of 3.0%, as supply shocks from the previous year have faded.

The Bank also pointed to slow economic activity as a motivation for the cut in the interest rate. Although external demand is recovering, underpinned by the economic momentum in many developed economies as well as higher oil prices, slack in the economy persists. The Bank stated that economic growth is below potential and the output gap is expected to expand in 2018. In contrast with last month’s communiqué, in which BanRep pointed to stronger economic activity in Q3 and the recovering external sector as reasons to leave the policy rate unchanged, October’s communiqué emphasized the spare capacity in the economy and alluded to a need for more expansionary policy.

In its forward guidance, the Bank stated that October’s cut should not be interpreted as “part of a continuous path of cuts”. However, if inflation remains subdued and offers more space for expansionary monetary policy, the Bank may continue its dovish approach and could reduce the rate further sometime in 2018.

The next monetary policy meeting will be held on 24 November. LatinFocus Consensus Forecast panelists expect the policy rate to end 2018 at 4.58%, and to end 2019 at 4.72%.

EXTERNAL SECTOR | Export growth jumps in September In September, exports expanded a robust 19.3% year-on-year, a strong acceleration from August’s meager 1.5% growth. According to the National Department of Administrative Statistics (DANE), the solid performance in

September was fueled by growth in oil and hydrocarbon exports. In August—the most recent month for which data is available—imports contracted 0.6% in annual terms, strongly contrasting the revised 12.2% expansion recorded in July (previously reported: +11.8% year-on-year). The

contraction was the result of a sharp drop in oil and hydrocarbon imports. Meanwhile, the trade deficit totaled USD 0.9 billion in August, narrowing from the USD 1.0 billion shortfall recorded in the same month last year.

Panelists participating in the LatinFocus Consensus Forecast expect that exports will grow 6.8% in 2018 and 8.6% in 2019.

FUENTE: Desde Focus Economics - www.focus-economics.com - FocusEconomics Consensus Forecast América Latina - Nov. 2017