Bracing for an Anemic 2017
Growth projections of above 2% for 2017 now look rather remote, given Q2 results. Economic activity expanded by just 1.3%, similar to in Q1. H2 growth would have to top 3% for GDP to grow by the 2% the government forecasts, which now seems unlikely. This will probably lead to renewed congressional discussions over the 2018 proposed national budget, as revenue expectations for 2018 will be reduced by weaker 2017 growth, and lower expected income tax payments.
The fastest-growing sectors in Q2 were agriculture, finance and social services, while mining contracted by 6% (completing 10 quarters of shrinkage). Oil production came in below target, due to continued ELN bombings of the Caño Limón pipeline, which stopped production, and weak oil prices. So, even in the best of circumstances, oil production will fall in 2017, and mining GDP will keep contracting.
Manufacturing was down by 3.3% in Q2, in line with expectations, At least half of the subsectors continue to contract. Textiles, electrical equipment, shoe wear, mineral products and drinks fared particularly badly. We expect this sector to contract by 2.1% this year.
We’ve now cut our 2017 GDP forecast to 1.5%, from 1.8%. This considers that construction won’t be the driver of economic activity the government hoped for. Activity will likely continue to be led by consumption, while investment will remain weak, with the greatest share of consumption growth from the government. Consumer confidence is at a historical low, and uncertainly over the forthcoming election won’t bolster consumption or investment. Private sector investment, especially in oil, could pick up, but uncertainty linked to popular consultations won’t help. The government will try to boost economic activity via spending, and the Central Bank will do its share, via lower rates.
The COP 235.6 trillion 2018 proposed budget increases spending by a modest 1% in nominal terms, from the 2017 approved budget. Factoring in 4% inflation, this implies a spending cut in real terms, with a 5.5 trillion investment cut from 2017. So far so good. Yet the 2017 budget was the biggest in recent history, up more than 10% from 2016. That makes the 2018 plan seem less austere. Too, Congress tends to increase investment budgets and, thereby, fiscal deficits. This first draft aims to appease the rating agencies. But a potential sovereign debt downgrade is unlikely to affect Congress’ spending appetite. If history is any guide, neither austerity nor meeting fiscal deficit targets is likely to happen.
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