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Industrial
production plummets in March
In March,
industrial production contracted 9.4% over the same month last year, which
contrasted the 8.9% expansion registered in February. Furthermore, the
figure was the weakest reading since March 2002 and the first contraction
in nearly two years. In addition, the reading was affected by the Easter
holiday, which fell in March this year and resulted in fewer working days
than in the previous year. The March contraction was broad-based, with 34
of 48 production categories losing ground over the same month the year
before. That said, the main drivers of the March slowdown were iron and
steel production as well as vehicle manufacturing. Based on the
preliminary monthly figures, industrial production grew only 1.4% annually
in the first quarter, well below the 8.1% growth tallied in the fourth
quarter of 2007. Moreover, annual average growth in industrial production
continued to decline, plummeting from 9.6% in February to 7.4%, which
represented the slowest pace since September 2006. Additional data
confirm the weakness seen in industrial production, retail
in March were unchanged over the same month the previous year, down from
the previous month’s 6.6% expansion. As a result of the weak March
reading, first quarter retail sales grew only 2.8% over the same quarter
last year. The reading represents the slowest growth rate in more than
three years.
Consensus
Forecast participants anticipate industrial production growth to moderate
further to 6.6% in 2008, which is down 0.6 percentage points from last
month’s forecast. In 2009, the panel expects industrial production to
moderate to 5.4%.
Economy shows signs of
slowing
After having grown at a
fast clip in 2007, the economy is set to moderate strongly this year as
the result of a weaker domestic sector. Recent data support the notion of
weaker domestic demand in the months ahead. According to Fedesarrollo,
the consumer confidence index (ICC) decreased to 29.6 points in April from
30.9 points in March. The decline was due to deteriorating expectations
for the macro-economic situation, while expectations for personal
situation were generally more optimistic. That said, the index remains
well above the 0-point threshold that separates optimism from pessimism,
suggesting that private consumption will remain robust in the following
months. The Consensus Forecast panel expects that the slowdown in
domestic demand, as augured for by the decline in consumer confidence,
will only take hold in the second half of this year. In addition,
mounting inflationary pressures will likely force the Central Bank to
raise interest rates again, which, in turn, will further dampen prospects
for the domestic sector, especially investment. On the external front, in
contrast, there are signs of robustness, as high commodity prices will
likely keep export growth buoyant. In February, exports grew 48.8% year-on
year to reach US$ 2.8 billion.
Meanwhile,
imports added 33.1% annually and reached US$ 3.0 billion. Although
the monthly trade deficit jumped from US$ 102.5 million in April to US$
246.0 million, the result was well below the US$ 408.3 million deficit
registered in the same month the previous year. The panel foresees export
growth slowing to 12.7% for the full year, nearly half of the 23.1% growth
tallied last year. Imports, on the other hand, are expected to grow only
9.7%, well below last year’s 25.7% growth.
For this year, the
government expects the economy to grow at least 5.0%.
Consensus
Forecast panellists anticipate economic growth to reach 5.4% in 2008,
which is unchanged over last month’s forecast. For 2009, the panel
expects economic growth to moderate to 5.0%.
Inflation
shoots up to four-year high
In May,
consumer prices added 0.93% over the previous month. The figure came in
above April’s 0.71% result and more than doubled market expectations,
which had prices adding 0.40%. The monthly price rise was broad-based, as
seven of the eight categories composing the index increased over the
previous month. That said, the primary drivers of the price increase were
higher prices for food and housing. The price rise in housing continued
to reflect higher fuel prices, which are included in the housing
category. As a result of strong price increase registered in May, annual
headline inflation rose from 5.7% in April to 6.4%. The reading
represented the highest annual inflation rate since December 2003. On 23
May, before the publication of the May inflation data, monetary
authorities decided to keep the benchmark interest rate unchanged at
9.75%, despite pressure from the executive branch to lower interest rates
to spur economic growth. The Bank has raised interest rates 15 times
since April 2006, last lifting rates by 25 basis points on 22 February, as
inflation has persistently exceeded the upper end of the Bank’s target
range of 3.5% to 4.5% for this year. Monetary authorities cited
decelerating domestic demand and credit growth, which should help to
moderate inflationary pressures, as the key reason for their decision to
leave interest rates unchanged. Consensus Forecast panellists expect
inflation to moderate to 5.4% by the end of this year, which is 0.3
percentage points up from last month’s estimate. Next year, panellists
anticipate inflation to moderate to 4.4%, which is within the Central
Bank’s target range.
Peso strengthens to near nine-year high
In May, the
currency appreciated 1.38% in nominal terms to 1,756 pesos to the
US$. The reading came in below April’s 1.71% appreciation and constituted
the smallest gain observed in a single month since December last year.
The peso has been on a nearly uninterrupted upward trend since June
2006, when it was trading at 2,633 pesos to the US$. As a result
of the slower appreciation observed in May, the
currency
is now 9.9% stronger than a year ago, well below the 18.6% annual
appreciation recorded in April. That said, at the present rate, the
currency
is trading at the
highest level since June 1999. The
peso
has been
gaining ground against the US$ as a result of increased foreign direct
investment and the widening interest-rate differential between the country
and the U.S. Currently, the difference between the two countries’
benchmark interest rates stands at 7.75, the widest such spread in nearly
seven years. Finance Minister, Oscar Ivan Zuluaga recently stated that
the current level of the peso was detrimental to the economy. As a
result, the
government recently imposed new capital controls and extended the existing
ones in
an effort to stem the appreciation of the peso. The special
deposit requirement on new short-term foreign portfolio capital has been
raised from 40.0% to 50.0%. Additionally, a new measure requires foreign
direct investment to remain in the country for at least two years.
Consensus Forecast panellists expect
the
exchange rate to reach 1,909 pesos to the US$ by the end of 2008,
which would represent
a 4.9% annual
appreciation. Next year, panellists anticipate the exchange rate to
depreciate 5.8% nominally to reach 2,025 pesos to the US$ by
year-end.
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