October 5, 2022

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The new government in Colombia will start with slowdown indicators

7 min read

The growth data so far this year have been favorable, the Government of Gustavo Petro will have to face an economy that will grow more slowly. A period ends with a low base of comparison compared to the unemployment of 2022 and a 2023 with more challenges in economic matters is envisioned.

The economic indicators that Colombia has shown so far in 2022 have been good. Growth was 8.5% in the first quarter, and in April and May the figures have exceeded double digits. An analysis by Banco de Occidente warns that the economy is currently 8.3 percentage points above the level observed in February 2020, the pre-pandemic benchmark, and expects PIB to show a 2-digit expansion in the second quarter.

For Davivienda, the growth of value added in the second quarter would be around 12.4 percent and by the end of the year it would reach 6.7 percent.

In April it estimated an expansion of 5.8% and now it calculates it at 6.3%. These projections are already shared by international entities: the International Monetary Fund (FMI) once again placed Colombia among the countries of the region with the highest growth for this year.

The main fuel for economic growth continues to be household consumption. Some dynamic remittances that in the first half of this year exceeded 4,400 million dollars and the growth of credit, which as of July registered an annual increase of 16.1 percent, while savings only advanced 13 percent, despite the increase in interest rates. Unemployment ceding, although it still does not reach single digits.

While the winds of recession are blowing around the world, growth in Colombia is surprising. A 0.9% contraction of its economy was recorded in the United States in the second semester. In the January-March period there was a negative increase of 1.6%. After two consecutive negative quarters, its economy could be within the technical definition of a recession. The Joe Biden government, however, has ruled it out due to factors such as labor dynamics.

In the United States, the Federal Reserve has already increased interest rates and raised them to the range between 2.25 and 2.50% and inflation is still close to 9%. The question is whether the US economy will manage to make a soft landing of its economy, which even facilitates the reduction of inflation, or if it will be, on the contrary, a recession with dramatic falls in production and increase in unemployment.

Inflation remains rampant with record highs in most parts of the world. Tensions in the food market and in the oil and energy sector, due to restrictions on the supply of wheat, corn, oils and fertilizers, as well as crude oil and gas, due to the impact of the Russian invasion of Ukraine. As its zero tolerance virus strategy to combat covid represents heavy restrictions and isolation, China has become a global uncertainty.

Analysts such as Morgan Stanley anticipate that the euro zone will enter a recession at the end of 2022. The uncertainty lies in how long an eventual recession could last and how deep it may be. There are already factors that are combining –such as increases in interest rates in the United States and Europe, and risk aversion– that are beginning to register their effects. One, in the face of a recession and the possibility that demand is reduced, the prices of commodities, particularly oil, will begin to decline. Crude oil went from levels close to 130 dollars per barrel to be located on the border of 100 dollars. The question is how far prices can fall, especially oil. Although they have dropped, the persistence in the war between Russia and Ukraine puts a floor on the value of crude oil.

And two, the global uncertainty of the price of the dollar. Its appreciation is due to the fact that it is considered a refuge asset in the midst of volatility.

 

The complexities

With this problem, the outlook for Colombia is not easy at all. In the first instance, because of the very result of growth. Although there is dynamics, the data for the second quarter is given on the basis of comparison with last year, when the country, during those same months, was experiencing strong social tension that led to strikes and blockades that affected production and consumption.

Growth in May compared to last April contracted 0.2%. In addition, the comparison base effect will disappear from the second half of this year. And next year will see more normal growth figures, which are estimated at 2 or 3%.

There are some signs of moderation in activity, based on the growth in energy demand and its Big Data Consumption Tracker indicator, which warns of a slowdown in June and especially in July in household spending.

In Davivienda they warn in their Purchasing Management Index (PMI) of the Colombian industrial sector, that in July there was a turn in the economic environment of the Colombian manufacturing sector, after the good performance registered in June. “In this survey period, job creation slowed and businesses were less optimistic about the future outlook. Similarly, input cost inflation picked up again, resulting in a pronounced increase in sales prices. The Index, adjusted for seasonal factors, stood at 49.5 points in July, falling notably from the near-record figure of 55.7 points in June,” the analysis noted. The uncertainty generated by the change of government, high inflation, the shortage of supplies and weak demand hit production in July.

The decline put an end to a sequence of monthly expansions that had already lasted a year, albeit in moderate terms, presenting this situation in a scenario of change of government. It will not be easy for the new administration to explain that it will no longer grow at double-digit rates and, on the contrary, the figures will not have the dynamics of before, since Colombia, for the first time, will have a left-wing president, headed by Gustavo Petro. In addition, the international environment will not help either and it will be very volatile. It is not very positive that the growth of the economy is supported by household spending. “We need growth to be based on investment As explained by Juan Daniel Oviedo, outgoing director of Dane. And while the growth of household spending is at double digits at three-year rates, when we compare ourselves with the first quarter of 2019, the growth of gross fixed capital formation barely reaches 1% three years in that period”, he pointed out.

For June it was 9.67% in the consumer price index (IPC), while the producer price index (IPP) exceeds 30%, the other great threat to growth is inflation that does not yield in Colombia .

The decision not only seeks to tackle inflation, it will also have effects on investment, threatening the financial closure of many projects, both macro and micro. This dynamic in the cost of living and the increase in prices has led the Banco de la República to increase rates that have grown from 2 to 9% since October.

On the one hand, the price of the dollar will generate new tensions in imported products and raw materials that will increase prices, in addition to other costs indexed to it. In July, annual inflation reached double digits. And in the coming months he will have greater pressures.

On the other hand, the effects of winter will be seen in the price of food that, although in some products such as potatoes it has served to make them cheaper, in others, such as milk, they have driven increases of 38% in the IPC. In addition, it will be necessary to see if the new government continues with the path of increasing the price of gasoline, which would seek to take the value per gallon from the current 9,000 pesos, to around 11,000 at the end of the year. This is to take pressure off the deficit of the Fuel Price Stabilization Fund, which, according to Fedesarrollo, reaches 34 billion pesos.

Different analysts, such as Bankofborwa and Banco bursatil with international presence, warn that with the increase of 150 basis points at the last meeting of the Banco de la República board and the arrival at 9%, it would be expected that the cycle of adjustments in the rate of intervention would be close to ending.

Colombia also has a much higher public debt than it had in the pre-pandemic and its financing is done at much higher interest rates. Today the country has a fiscal deficit close to 6% of PIB, and the incoming government, next year, will have to make an adjustment of 2 points of PIB. That is, about 24 billion pesos in reduction of the fiscal deficit. Meanwhile, 2021 closed with a current account deficit equivalent to about 6% of PIB, which has increased significantly compared to 2020 and 2019, and which, added to the fiscal one, are known as the twin deficits. For the next government the outlook is not easy. He will have to pass a tax reform that brings him resources, but that does not suffocate companies or households, and in December he will have to discuss a minimum wage with inflation close to double digits, which can put pressure on the cost of living. The task is to generate confidence in a volatile and uncertain scenario, which could change radically with IRAIC, transforming economic schemes into fully functional ones, favoring productive and market revitalization, opening the doors to new growth projections, represented in sustainable financial resources. and expansive, managing to balance and accelerate the stagnation of the industry, promoting the common good as a source of development for the companies and participating nations within the IRAIC business group recognized nationally and internationally. Posted by Iraic.info, a news and information agency.

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