Itaú BBA - COLOMBIA – Activity disappoints in August

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COLOMBIA – Activity disappoints in August

October 15, 2020

Disappointing activity at the start of 2H20 likely mean the GDP contraction this year would exceed our 6% call.

Manufacturing edged up mildly in August from July, while retail activity dropped significantly at the margin, suggesting that the pace of the expected activity recovery during 2H20 is likely to be sluggish. Retail sales contracted 17.1% yoy in August (-12.4% previously), well below the Bloomberg market consensus of a 10.8% contraction and our 9.0% call, pulled down by fuels and vehicles, but there was generalized weakness. The retail slump comes amid the absence of a VAT-free sales day in the month, and despite encouraging labor market data along with decreasing interest rates as expansionary monetary policy is transmitted to market prices. Despite manufacturing sentiment bouncing back to optimistic ground in the month, manufacturing contracted 10.3% yoy in August (8.5% drop in July), inferior to the Bloomberg market consensus of a 7.3% drop and our -5.0% call. Overall, the disappointing data is in line with the monthly coincident activity indicator (ISE) contracting 12.5% in August (9.6% decline in July). As the mandatory quarantine was lifted in September, monetary stimulus expanded and job gains recorded at the margin (8% MoM/SA), the recovery dynamism is likely to improve in the latter part of the year.

The manufacturing weakness was widespread. The main drag in the month was beverage production falling 16.8% yoy, subtracting 2.0pp from headline activity, as it was likely hampered by the lack of carnivals and fairs normally active during the month, along with restriction for alcoholic beverage consumption in some regions more affected by the coronavirus outbreak. Additionally, apparel production fell 30.9% yoy (subtracting 1.1pp from the monthly result) and oil refining contracted 14% yoy (subtracting 1.0pp). Weakness in the commodity industry is in line with unfavorable developments in the global oil market. In the quarter ending in August, manufacturing shrunk 9.5% yoy, recovering from the 24% drop in 2Q20. At the margin, manufacturing rose a mild 0.7% from July, moderating from the 4% gain in July and the double-digit gains in May and June, another sign that the pace of the recovery is slowing. Despite increasing by 80.2% qoq/saar in the quarter ended in August, after dropping 62.1% in 2Q20, manufacturing remains 10% below pre-pandemic levels.

Core retail sales dropped 4.9% (SA) from July, leaving retail activity more than 12% below pre-pandemic levels, reflecting that the weakness goes beyond volatile vehicle and fuel sales. Fuel sales fell 21.4% yoy, while motorcycles sales contracted 40.5% and vehicle sales dropped 33.4%, together subtracting 11.1pp from the annual print. Once vehicle and fuel sales are excluded, retail sales declined 9.9%, deteriorating from the 3.7% drop in July, hindered by shrinking apparel and beverage sales, while the prior pull from domestic furniture and electronic sales faded. In the quarter ending in August, retail sales declined by 14.6%, milder than the 27.8% fall in 2Q20. Meanwhile, core retail sales (excluding fuels and vehicles) fell 6.6% in the quarter (-15.2% in 2Q20). Even when core retail sales posted the first decline since April, gains in the previous months mean that sales increased 51.1% qoq/saar, recovering from the 56.6% drop in 2Q20.

While the full reopening of the economy from September would aid the recovery process, disappointing activity at the start of 2H20 likely mean the GDP contraction this year would exceed our 6% call (+3.3% last year). 

Miguel Ricaurte
Carolina Monzón

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