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Softening domestic demand supports lower rates ahead.
2023/08/14 | Andrés Pérez M., Vittorio Peretti, Carolina Monzón & Juan Robayo

Contractionary monetary policy and still elevated inflation are contributing to the domestic demand adjustment. Retail sales fell by 11.9% YoY in June (5.1% down in May; also affected by base effects), well below the Bloomberg market consensus of a 7.0% drop and our call for a 7.5% fall. Core retail sales (excluding fuels and vehicles) were broadly flat at the margin leading to an annual decline of 11.1% YoY (2.8% down in May). Meanwhile, manufacturing contracted 1.1% MoM/SA, leading to a 4.8% YoY decline (-3.1% previously), deeper than the Bloomberg market consensus of a 3.0% drop, while closer to our 4.0% call. During the second quarter of the year, activity indficators showed clearer signs of softening domestic demand that, along with the significant COP appreciation YTD, will ease inflationary pressures ahead and likely lead to a rate cut discussion during 4Q23. 


Manufacturing fall deepened 2Q23. During the second quarter of the year, manufacturing fell 4.8% YoY, down from the 0.5% drop in the 1Q23. At the margin, manufacturing contracted 6.8% qoq/saar, after a fall of 8.5% in 1Q23. Manufacturing levels are now 10.8% above pre-pandemic levels, retreating from the near 18% peak during 3Q22. 


Retail sales remained weak. During 2Q23, retail sales contracted 8.0% YoY, from the 2.2% drop in 1Q23, while core retail sales decreased 5.5% (-1.7% in 1Q23). At the margin, core retail sales contracted 5.9% qoq/saar, down from +0.9% in 1Q23. Core retail sales now sit 12.6% above pre-pandemic levels (+24% by mid-2022). 


Despite the upside activity surprise in 1Q23, the economy is decelerating, reflecting the effects of the tight monetary policy stance. We expect the Colombian economy to decelerate sharply this year to 1.3% (from 7.3% in 2022).