Itaú BBA - COLOMBIA – Record GDP drop in 2Q20

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COLOMBIA – Record GDP drop in 2Q20

August 14, 2020

Dynamics within the quarter are in line with a gradual recovery

A historic GDP contraction was recorded in 2Q20, but in line with high frequency data, a gradual recovery at the backend of the quarter is unfolding. Activity shrunk 15.7% YoY in the second quarter of the year, similar to the Bloomberg market consensus of 15.4% drop and our -15.1% call. The deep decline follows a 1.4% rise in 1Q20 (revised up by 0.3pp) and 3.3% increase last year. In the first half of the year, GDP shrunk 7.4%. Given the nationwide lockdown throughout the quarter, in a bid to slow the spread of Covid-19, it is unsurprising that a key drag came from commerce and hospitality related services (restaurants, hotels, transportation; -6.6pp drag), while restrictions and dampened domestic demand hindered manufacturing (-3.1pp) and construction (-2.1pp) activities. Meanwhile, gross fixed investment shrunk by a third, and despite fragile internal demand, the global economic slowdown meant a near-neutral net-export contribution. Although GDP fell by 47.6% from 1Q20 (annualized; 8.2% drop in 1Q20), the monthly activity indicator ISE shows gains in both May and June, suggesting the worst of the crisis is behind the Colombian economy.

The activity decline in the quarter was partially contained by public consumption growth of 3.0% (in line with 1Q20), the only demand-side category that increased. As the labor market loosened swiftly (nearly 5 million jobs shed from 2Q19; -22%) and mobility restrictions were in place, private consumption nose-dived with a fall of 15.9% (+3.8% in 1Q20), dragged by services and transportation. Meanwhile, gross fixed investment posted a 32.2% decline (4.9% drop, previously). As a result, final domestic demand contracted 16.8% YoY (+1.2% in 1Q20). With exports falling 27.4% and imports down 28.8%, the net export contribution was near neutral. On the supply-side, commerce led the activity decline, falling 34.3% YoY (+2.0% in 1Q20). Manufacturing decreased 25.4% (0.6% fall in 1Q20), while construction collapsed 31.7% (9% fall in 1Q20). Overall, non-natural resource sectors contracted 16.6% YoY, exceeding the 9.5% drop in natural resource related activity.  

There was a historic drop at the margin, but dynamics improved within the quarter. The seasonal and calendar adjusted series shows that the 47.6% qoq/saar decline in 2Q20 was led by gross fixed investment slumping 78.8% qoq/saar (+2.1% in 1Q20) and private consumption falling 54.9% qoq/saar (+3.4% in 1Q20). According to the monthly coincident indicator (ISE), GDP shrunk 7.5% MoM in March and 15.3% MoM in April, but since then monthly gains of 5.3% and 5.5% in May and June, respectively, have unfolded. Such dynamics are in line with the expectation that as the economy reopens and the global economy rebounds, a gradual recovery would ensue.

The significant shock to the Colombian economy is likely to result in a 6% contraction this year (+3.3% last year). The subsequent widening of the output gap and dampening of inflationary pressures lead us to estimate that there remains room for the central bank to ease monetary policy and support the recovery process ahead (we see rates at 2%). While data at the close of 2Q20 suggests a recovery process is underway, downbeat private sentiment, still-low terms-of-trade, significant job losses and elevated uncertainty mean the recovery process will likely be slow.

Miguel Ricaurte
Carolina Monzón

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