Itaú BBA - COLOMBIA – Activity recovery stalls in 1Q19

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COLOMBIA – Activity recovery stalls in 1Q19

mayo 15, 2019

We expect activity to improve from last year, but downside risks to our outlook are rising

Activity in the first quarter of 2019 came in below expectations and showed a notable momentum slowdown. Activity increased 2.8% year-over-year in 1Q19 (2.7% in 4Q18), below the Bloomberg market consensus of 3.0% and our 3.4% call. After adjusting for seasonal and calendar effects, GDP grew an even milder 2.3% from last quarter (2.7% in 4Q18). The bulk of the surprise to us came from weaker construction and public administration. Meanwhile growth for 2018 was revised down 0.1pp to 2.6%. Overall, an output gap that is still widening and growing external risks to the recovery point at the central bank retaining a mildly expansionary monetary policy going forward.

After two quarters of positive contributions, construction contracted sharply in 1Q19, while the rebound of natural resources-related activity aided growth in the quarter. Construction contracted 5.6% year-over-year (+4.5% previously), the sharpest decline since 2Q13 as the real-estate sector deteriorated. While construction was a key drag to the recent slowdown, shrinking for six consecutive quarters since the close of 2016, we note that a more favorable base of comparison ahead could lead to some improvement in this sector in 2Q19. Recovering commerce and financial service activity could only partly offset the construction weakness, resulting in non-primary related activity slowing to 2.7% (3.1% in 4Q18). Also driving activity in the quarter was the improvement of mining growth to its best performance since 4Q13 (5.3% yoy; 0.0% in 4Q18), lifted by oil extraction and metallic mining. Overall, natural resource related activity grew 3.1% (0.6% previously).

Net exports remain the key drag to activity in the quarter. Full details of the demand-side breakdown are pending, but the press release shows that total consumption remained elevated at 3.8% in 1Q19 (4% in 4Q18, barring any revision), while total investment (including inventory accumulation) slowed to 2.8% (6.7% previously). Meanwhile, broadly stable import growth at an elevated 13.7% (exports: 3.8% yoy) resulted in a still large net export drag.

At the margin, activity came to a halt (0% qoq/saar vs. 2.8% in 4Q18), the slowest pace since 1Q17. Construction and manufacturing drove the activity slowdown, only partly offset by the natural resources-related bounce back.

We expect activity to improve from last year, but downside risks to our outlook are rising. The recovery to 3.1% (2.6% for 2018) would be aided by the monetary stimulus, recovering real wage growth (given low inflation) and upbeat private sentiment. Nevertheless, lower global growth following heightened trade war tensions could lead to an even milder recovery.
 

Miguel Ricaurte
Carolina Monzón



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