Itaú BBA - COLOMBIA – Weak 1Q20 GDP: a preview of things to come

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COLOMBIA – Weak 1Q20 GDP: a preview of things to come

May 15, 2020

The central bank will continue enhancing liquidity measures to ease the functioning of the financial system and to protect business operations and employment.

Despite an upbeat start to the year, the March onset of the coronavirus outbreak in Colombia and the oil price collapse meant activity disappointed in 1Q20. Activity increased by a mild 1.1% yoy (3.5% in 4Q19) well below the Bloomberg market consensus of 1.5% and our 2.2% estimate and the lowest recording in two years. The seasonal and calendar adjusted series shows growth at an even lower 0.4% yoy (given the leap year effect). Activity in the first two months of the year was growing at just over 4%, while shrinking 4.6% yoy in March, according to the coincident indicator ISE. The bulk of the quarterly surprise to us came from weaker-than-expected construction and mining. While the consumption slowdown was moderate, the drop in investment and export activity dragged growth down. With the nationwide lockdown extended through to the close of May, investment dynamics would deteriorate further, while consumption would implode, in line with the confidence slump to historic lows in April. 

Mining, manufacturing and construction contracted significantly in the quarter, shedding a combined 0.9pp from activity, while the decline in entertainment services was also strong. Construction contracted 9.2% yoy, from -0.2% in 4Q19, hampered by the housing subsector. Manufacturing dropped 0.6% in the quarter from 1.5% as industry operations closed at the end of March due to the mandatory quarantine. Oil and coal production dropped amid lower external demand and price falls, leading mining to contract 3.0% (+1.8% previously). Yet, activity in the natural resource sectors slowed gradually to 2.5% (3.2% previously) as agriculture accelerated to 6.8% yoy (from 4.4% previously), offsetting the weak mining performance. Meanwhile, non-natural resource sector activity collapsed to 0.9% yoy (from 3.5%) with widespread weakness. Commerce slowed to 0.9% yoy, from 5.1%, amid deteriorating private sentiment. Entertainment services recorded the sharpest historical decline (-3.2% vs. +2.3% in 4Q19) on the back of being the first sector that closed operations to slow the virus outbreak.

On the demand side, the fall in activity was due to weak exports and the investment decline. Gross fixed investment contracted 4.9% yoy (0.3% in 4Q19), the slowest pace since 3Q16, dragged by real estate. Additionally, the net export drag intensified as exports fell 6.1% (vs. -1.0% previously) while imports declined 2.5% (+1.3% in 4Q19). Low oil prices have hampered export dynamics, while the import deterioration is set to amplify as domestic demand comes to a halt in 2Q20. Private consumption, a key driver of Colombia’s economic recovery in recent times, slowed to 3.8% yoy (from 4.5% in 4Q19), with disruption to business operations at the end of March and a loosening labor market explaining the weakening. Public consumption moderated to 3.2% from 3.7% in the previous quarter. Overall, internal demand slowed to 1.4% from 3.7% in 4Q19.

At the margin, activity contracted a whopping 9.2% qoq/saar, from +1.9% in 4Q19, the sharpest decline on record. The activity drop was the first such case since 4Q15. The decline was pulled down by construction, manufacturing and entertainment services. From the demand side, total investment sharply contracted 17.4%. The deterioration of export dynamics worsened with a fall of 13.7% qoq/saar (8.6% drop in 4Q19). While gross fixed investment grew a mild 2.1% qoq/saar (-7.6% previously) and private consumption rose 3.2% qoq/saar (2.6% in 4Q19), the turbulent scenario consolidating in 2Q20 means that the worst is yet to come.

We expect activity to contract 4.7% this year (+3.3% last year), with risk tilted to a deeper decline if the social distancing measures are further extended, confidence fails to recover and corporate balance sheets falter. With the risks so great, we expect the central bank to continue enhancing liquidity measures to ease the functioning of the financial system and to protect business operations and employment. 
 

Miguel Ricaurte
Carolina Monzón



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