|
Economic growth is set to decelerate
notably compared to last year’s record pace, primarily as a result of a
weaker domestic sector. Consumption is suffering from high inflation, which
is eroding consumers’ purchasing power and, consequently, has led to strong
declines in consumer confidence. Moreover, investment is likely to halve the
expansion pace amid the monetary tightening carried out by the Central Bank.
Against this backdrop, price pressures are likely to subside somewhat in the
second half of the year. |
|
Industrial
production contracts in May
In May,
industrial production contracted 4.3% over the same month last year, which
strongly contrasted the 9.9% expansion registered in April. Furthermore,
the reading far undershot market expectations of a 6.1% annual expansion.
The May contraction was broad-based, with 30 of 48 production categories
losing ground over the same month the year before. That said, the main
drivers of the May slowdown were vehicle manufacturing and non-metal
minerals. As a result of the weak May reading, annual average growth in
industrial production continued to decline, plummeting from 7.5% in April
to 6.1%, which represented the slowest pace since July 2006. Consensus
Forecast participants anticipate industrial production growth to moderate
further to 5.2% in 2008, which is down 1.1 percentage points from last
month’s forecast. In 2009, the panel expects industrial production to
moderate to 5.0%.
Consumer
confidence plummets
The
outlook for economic growth is deteriorating rapidly as prospects for the
domestic sector are increasingly sombre. In June, the consumer confidence
index (ICC) published by Fedesarrollo, plummeted 10 points from
21.4 in May to 11.4 after consumer confidence had already fallen 8.2
points in the preceding month. The decline reflected deteriorating
perceptions of both the macroeconomic situation and the personal
situation. Although the index still remains above the 0-point threshold
that separates optimism from pessimism, the sharp decline observed in the
past months suggests that private consumption may weaken significantly in
the months ahead. Deteriorating consumer expectations are underpinned by
accelerating inflation, which is increasingly eroding consumers purchasing
power. In addition, mounting inflationary pressures will likely force the
Central Bank to continue tightening its monetary policy and raise interest
rates again in the coming months, which, in turn, will further dampen
prospects for the domestic sector. In contrast to the developments in the
domestic sector, on the external front, the country is profiting from high
commodity prices, which will likely keep export growth buoyant. While
Consensus Forecast panellists expect export growth to moderate from 23.1%
year-on-year last year to 18.6% imports are foreseen to decelerate even
more (2007: +25.7%; 2008: +11.3% yoy), resulting in a significantly
smaller trade deficit for the full year. The government expects the
economy to expand at least 5.0% this year. Consensus Forecast panellists
anticipate economic growth to reach 4.8% in 2008, which is down 0.5
percentage points from last month’s forecast. For 2009, the panel expects
economic growth to moderate to 4.4%.
Central
Bank raises interest rates
In July,
consumer prices added 0.48% over the previous month. The result was well
below the 0.86% price rise observed in June and also undershot market
expectations of a 0.54% increase. The primary drivers of the monthly
price rise were higher prices for food as well as for transport. As a
result of the July figure, annual headline inflation rose from 7.2% in
June to 7.5%, which represented the highest inflation rate in over five
years. At the current level, inflation exceeds the upper end of the
Bank’s target range of 3.5% to 4.5% by a wide margin. Consequently, on 25
July, before the publication of the July inflation data, monetary
authorities raised the benchmark interest rate by 25 basis points to
10.00%. The Bank has raised interest rates 16 times since April 2006,
last lifting rates by 25 basis points on 22 February. Finance Minister
Iván Zuluaga recently stated that this year, inflation is set to exceed
the Central Bank’s target range for the third consecutive year, but that
the government expects price pressures to start showing signs of
moderation as of next month. Consensus Forecast panellists expect
inflation to moderate to 6.6% by the end of this year, which is 0.7
percentage points above last month’s forecast. Next year, panellists
anticipate inflation to moderate to 4.8%, which is still above the Central
Bank’s target range.
|
