A Weak Start
After a sobering Q1, we’ve cut our 2017 GDP growth forecast, to 1.9% from 2.5%. That’s also closer to the Central Bank’s 2% annual growth forecast. These results, and a more dovish Central Bank board composition, as expected lead the Bank to cut rates faster – 50 bp this month. We expect rates to fall to at least 5.5%, but if inflation expectations recede, perhaps further.
Leading indicators in Q1 show private demand weakening faster than expected, with consumers behaving fitfully. Economic deterioration has had a negative impact on consumption. Unemployment is rising, to 10.5% in March, and informal job creation is outpacing formal job growth. And the credit market is cooling.
The sectoral outlook is equally grim. Manufacturing performed poorly early this year. This was to be expected, as the Cartagena Refinery, which accounted for 3pp of refining in 2016 (which in turn accounted for 1.5 pp of manufacturing activity) restarted a year ago. Its influence on output would therefore have completely faded by the Q1 2017.We now expect manufacturing to shrink by 2.5% in Q1, and are forecasting annual sectoral contraction of 1.8%, down from our original forecast of 0.4%.
This year’s main economic activity driver should be construction, particularly public works, and private investment in the fourth generation concession projects.
In peace accord progress, six more proposals are being discussed in Congress, on topics like political reincorporation, and electoral and royalty reform. The extension of the fast-track mechanism for another six months has raised some eyebrows; the situation allows for a legislative agenda with a questionable relation to the peace process to proceed with little debate.
There are too many issues, most with profound consequences for the polity and the economy of Colombia, being fast-tracked, with an extremely tight schedule to finalize all this by yearend. Yet there’s no alternative: President Juan Manuel Santos must start electoral year 2018 with the eight-year-long peace process complete.
There’s widespread consensus that an interest rate cut is needed. The finance minister likely voted for a 50bp cut during the last Bank board meeting; the head of the manufacturing industry guild is asking for a 100 bp cut. But as expected, there was a 50 bp cut. Yet it’s not clear how quickly, or low, rates will fall. The government’s budget addition indicates that public expenditure will rise by 10.3% from 2016. Look to the key variables of non-tradeables inflation and GDP estimates to assess whether rates will be cut even further, to 5%.
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