Itaú BBA - COLOMBIA – Sequential activity recovery in June

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COLOMBIA – Sequential activity recovery in June

August 13, 2020

Downbeat private sentiment, still-low terms-of-trade, significant job losses and elevated uncertainty point to a gradual recovery process ahead

Despite activity indicators continuing to shrink over twelve months in June, gains at the margin are in line with an expected recovery. Retail sales fell 14.2% yoy in June, somewhat sharper than the Bloomberg market consensus of 12.0% and our 10.0% forecast, but far more benign than drops recorded in the prior two months. Gains in sales of domestic electronics (favored by one VAT-free day in June) and a milder decline of vehicle sales, as the economy reopens, were key to the improvement. Meanwhile, manufacturing contracted 9.9% yoy, milder than the 15% drop expected by us (also the Bloomberg market consensus). Oil refining dragged activity in the month, while food processing contained the decline. Tomorrow (August 14), GDP data for the second quarter of the year will be released. The activity indicators are consistent with an unprecedented GDP decline of 15.1% yoy (+1.1% in 1Q20).

Retail sales contracted 27.7% yoy in 2Q20, a sharp drop-off from the 5.0% rise in 1Q20, amid the nationwide lockdown and significant job destruction. Reduced vehicle (down 61.5% over one year) and fuel sales (38.3% fall) were key drags in the quarter. Nevertheless, core retail sales (excluding vehicle and fuels) were also weak, shrinking 15.1% yoy (7.4% increase in 1Q20). At the margin, core retail sales fell 53.6% qoq/saar, a significant acceleration from the 2.8% drop in 1Q20. However, two consecutive prints of double-digit monthly gains at the backend of the quarter point to a recovery underway as the economy gradually reopened (also aided by June’s VAT-free day). Still, a meaningful consumption recovery ahead is constrained by the fact that consumer confidence remains stuck near historical lows and the labor market continues to loosen.

Manufacturing slumped 24.0% yoy in 2Q20, amid reduced demand, deteriorating from the 0.4% drop in 1Q20. Weakness was widespread in the quarter, with 84% of the product classes contracting (vs. 59% in 1Q20). At the margin, activity fell 62.6% qoq/saar, a steeper contraction from the 8.6% drop in 1Q20. While the shock to manufacturing occurred in the months of March (-11.2% MoM) and April (-26.8% MoM), when the lockdown began, a partial recovery has since been seen (+16.3% in May and +13.0% MoM in June). Hence, similarly to retail activity, dynamics at the margin suggest that the activity slump has already bottomed out.

We expect a GDP contraction of 6% this year (+3.3% last year) leading to a sharp widening of the output gap. Despite some upbeat signs at the end of 1H20 amid looser social distancing measures, downbeat private sentiment, still-low terms-of-trade, significant job losses and elevated uncertainty mean the recovery process will likely be gradual. Additionally, as Covid-19 caseloads remain elevated, the pace of reopening of economy could be slower than expected.

Miguel Ricaurte
Carolina Monzón

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