Colombia outlook is stable. Economic growth weakened slightly in Q3 as the government intensified its fiscal consolidation efforts...

Colombia Economic Outlook

Colombia outlook is stable.
Economic growth weakened slightly in Q3 as the government intensified its fiscal consolidation efforts and fixed investment growth slid on weaker business confidence and a wider slowdown in manufacturing activity. Leading indicators point to a moderation going into Q4, with consumer confidence falling further into negative territory in October on downbeat sentiment over general economic conditions. The manufacturing PMI also lost ground in October–November. After failing to gain approval for the first and second draft of the tax bill, the government is set to present a notably watered-down tax reform proposal to Congress, with its original revenue target halved. Fierce opposition forced the government to abandon the planned tax of basic foodstuffs, thereby compelling a freeze on spending in order to meet the fiscal goals and avert a potential credit rating downgrade.

The economy is expected to gain steam next year, powered by higher oil prices, increased investment in the extractives sector and an upturn in domestic demand. A tighter labor market should buoy private consumption, while an acceleration in fixed investment should also fuel growth. However, although the country’s debt dynamics have improved, slashing corporate taxes could present challenges in meeting the fiscal targets, notwithstanding the positive impact on investment. FocusEconomics panelists expect GDP to grow 3.2% in 2019, which is unchanged from last month’s forecast, and 3.2% again in 2020. • Inflation inched up to 3.3% in October from 3.2% in September, as a weak peso and higher commodity prices stoked price pressures. FocusEconomics panelists expect inflation to end 2019 at 3.4% and 2020 at 3.3%. • At its 26 October meeting, Colombia’s Central Bank held the benchmark interest rate at 4.25%, where it has been since the wind-up of the protracted easing cycle at the end of April. Firmer economic activity, thanks to higher oil prices, coupled with muted inflationary pressures, motivated the Bank to stay put and maintain a neutral tone. A riskier external environment will likely lead to a tighter stance, with the Consensus predicting the policy rate to end 2019 at 4.86% and 2020 at 4.95%.

On 30 November, the Colombian peso ended the day at 3,239 per USD, weakening 1.6% over the same day in October. The recent depreciation in the peso came as the government announced its plan to submit the tax reform bill with half of its original revenue target, which would pose challenges to reducing spending or modifying fiscal goals to satisfy credit rating agencies. FocusEconomics analysts see the peso gaining further strength and ending 2019 at 3,106 per USD and 2020 at 3,095 per USD.

According to the latest GDP data released by the National Statistical Institute (DANE) on 22 November, the economy grew at broadly the same pace in the third quarter as it did in the second, dipping just marginally. In annual terms, GDP accelerated 2.7% in Q3, inching down from the previous quarter’s 2.8% which had marked the fastest pace of growth since Q1 2016. On the domestic side of the economy, private consumption growth accelerated from 2.7% in Q2 to 3.2% in Q3 as subdued inflationary pressures shored up households’ purchasing power. On the other hand, fixed investment growth tumbled to 0.7% in Q3, down from 2.3% in Q2, as financing conditions became less favorable. The downturn in this component reflected contractions in the investment of housing, along with machinery and equipment. Moreover, government consumption rose at a slower pace of 4.5% in Q3, down from 5.9% in Q2, as the government continued to strengthen fiscal consolidation measures. Turning to the external sector, export growth fell from 3.0% in the second quarter to 1.2% in the third quarter, as global demand slowed owing to heightened tensions between the U.S. and China, coupled with political uncertainties. Imports also lost some steam, growing 5.1% in Q3 from 5.7% in Q2. Thus, the external sector’s drag on growth was more severe in Q3 compared to the second quarter. In seasonally-adjusted, quarter-on-quarter terms, growth continued to weaken from 0.6% in the second quarter to 0.2% in the third quarter. While economic activity is expected to remain strong, thanks to improving domestic demand and higher projected global oil prices, lingering uncertainties around the new tax reform bill present challenges to achieving the fiscal consolidation goals and continue to pose downside risks to the growth outlook. 

“The Colombian economy is set to continue accelerating along 2019 led by higher investment. That said, the final outcome of the tax bill currently under discussion in Congress will be key to assess any potential, short-term impact on economic growth, particularly on private consumption as individual taxes will be increased. Favorably, the proposal of broadening the VAT to basic goods has been removed from the bill, easing concerns about a strong potential effect on inflation and consumption next year. In any case, seeking resources for the upcoming years remains the main challenge of fiscal policy as the fiscal path is demanding.” Daniel Velandia, chief economist at Credicorp Capital

PMI falls for the fourth consecutive month in November amid wider global slowdown in manufacturing activity Colombia’s manufacturing sector lost pace for the fourth consecutive month in November, reflecting a wider slowdown in manufacturing activity worldwide amid intensifying trade war tensions. The seasonally-adjusted Davivienda manufacturing Purchasing Managers Index (PMI) fell to 51.6 from 52.0 in October. The index thus moved closer to the crucial 50-point threshold that separates improvement from deterioration in the sector, reflecting a weaker rate of expansion in manufacturing activity. 

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