Itaú BBA - COLOMBIA – Slower-than-expected activity recovery in July

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COLOMBIA – Slower-than-expected activity recovery in July

September 14, 2020

We revised our forecast for the July monthly coincident indicator (ISE) to a decline of 9.2%, only a modest improvement from the 11.1% drop in June.

Activity indicators in July underwhelmed expectations, indicating that while the worst of the slump is behind, the recovery path is likely to be slow. Retail sales contracted 12.4% yoy in July (-14.1% previously), broadly in line with the Bloomberg market consensus, but well beyond our 8.0% call as gains at the margin moderated significantly. Meanwhile, manufacturing contracted 8.5% yoy (-9.8% in June), larger than the Bloomberg market consensus of a 4.6% drop and our 4.0% call. On the back of the weaker-than-expected data, we revised our forecast for the July monthly coincident indicator (ISE) to a decline of 9.2% (from 3.5%), only a modest improvement from the 11.1% drop in June. The sluggish recovery and contained inflationary pressures mean we cannot rule out the central bank opting to increase the monetary stimulus further going forward.
At the margin, manufacturing advanced for the third consecutive month, but production remains 10% below pre-pandemic levels. Manufacturing in July was once again dragged by beverage production falling 11.4% yoy, subtracting 1.3pp from headline activity and likely reflecting the lack of demand for non-essential goods amid the mobility restrictions. Additionally, mining production fell 15.9% yoy (subtracting 1.1pp from the monthly result) and apparel production contracted 29.4% yoy (subtracting 1.0pp). The drag was partially countered by increased food processing. In the quarter ending in July, manufacturing shrunk 14.9% yoy, moderating from the 24% cycle low in 2Q20. At the margin, manufacturing fell 4.6% qoq/saar, recovering from the 62.6% drop in 2Q20. Nevertheless, following double-digit month-over-month gains in May and June, a milder 4.5% increase was recorded, in line with an expected, but only partial recovery in the 3Q20.

Considering that strict mobility restrictions were only lifted in September, it is unsurprising that fuels and vehicle divisions drove the 12.4% yoy retail sale contraction in July. Fuel sales fell 19.7% yoy, while vehicle sales dropped 18.1%, together subtracting 7.1pp from the annual print. The decline was partly offset by the rise of electronic sales and home appliances (adding a combined 2.4pp to the headline result), in line with stay-at-home orders and also the incentivized VAT-free sales day. In the quarter ending in July, retail sales declined by 17.8%, improving from the 27.7% fall in 2Q20. Meanwhile, core retail sales (excluding fuels and vehicles) fell 8.1% in the quarter (-15.2% in 2Q20). At the margin, core retail sales contracted 0.9% qoq/saar, from the 63.5% drop in 2Q20, although the gain from June to July slowed to 1.7% (16% previously). Core retail sales are at 90% of pre-pandemic levels. Overall, the data is in line with a recovery that is expected to consolidate in months ahead as the reopening of the economy advances. Nevertheless, still-low consumer confidence levels and significant job losses pose a headwind to the speed of the rebound. 

The significant shock to the Colombian economy is likely to result in a 6% contraction this year (vs. +3.3% last year). A recovery during 2H20 and 2021 would be aided by the end of social distancing measures and improving terms-of-trade. The relatively modest fiscal and monetary response to the COVID-19 crisis relative to other countries in the region would prevent a more rapid recovery.

Miguel Ricaurte
Carolina Monzón

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