Colombia’s economy increased sequentially in 1Q23 for the seventh consecutive quarter, but there are clear signs that the domestic demand adjustment is consolidating. The economy grew 1.5% (SA) from 4Q22 to 1Q23, leading to a 3.0% YoY rise (2.1% in 4Q22, revised 80bps down). Annual growth in the quarter was below the Bloomberg market consensus of 3.4% and our 3.3% forecast. In annual terms, activity was pulled up by financial services and entertainment, while dragged down by construction. Despite another quarter of sequential growth, the breakdown shows activity dynamics are led by government spending and net exports, as high interest rates and eroding disposable income lead to a domestic demand slowdown. Investment fell sequentially (particularly machinery and equipment), and imports fell significantly (signaling that the moderating pull of private consumption is expected to consolidate ahead). GDP growth for 2022 was revised down 20bps to 7.3%. With the economy clearly weakening, and inflation having peaked in March, we believe the hiking cycle concluded with rates at 13.25%. Yet, with still wide twin deficits and high inflation, rate cuts this year are unlikely.
Construction remains a key drag. Financial and insurance services rose at a double-digit pace from 1Q22, alongside entertainment services. Meanwhile, construction contracted 3.1% (down from the -1.6% fall in 4Q22), pulled down by civil works. Overall, natural resources recovered, rising by 1.6% YoY (-3.2% in 4Q22), while non-natural resource activity increased 3.1% YoY (2.7% previously).
Private consumption and investment weakened in 1Q23. Private consumption rose by 2.9% YoY, moderating from the 3.9% registered in 4Q22. Services lifted annual growth in 1Q23 (but moderated to 6.4% YoY; 9.1% in 4Q22), while durable goods consumption continued to contract at a near double-digit rate. Gross fixed investment contracted to 1.0% YoY (+8.0% in 4Q22, the first drop 4Q20), while total investment fell 10.3% (+18.4% previously), amid an accelerating destocking of inventory. While public consumption contracted 0.2% YoY, it reflects a significantly milder drag than in previous quarters (-6.3% in 4Q22). Amid slowing private consumption and a worsening economic outlook, imports contracted 7.5% YoY (+7.6% previously). Exports expanded 5.1% YoY (-0.7% in 4Q22), resulting in a significantly gain in the net exports contribution to GDP.
At the margin, activity increased 5.9% qoq/saar, up from the 1.6% in 4Q22. Accelerating public consumption (+33.2% qoq/saar, from -13.1% in 4Q22), strengthening exports (+22.7%), and the double-digit imports decline supported activity at the margin. Private consumption increased 2.2% qoq/saar, down from the 3.1% in 4Q22. Gross fixed investment fell 3.7% qoq/saar, (+2.8% previously) likely hampered by reform discussions, and overall policy uncertainty. The monthly coincident activity indicator (ISE) increased 0.4% from February to March (SA), lifted by the primary sector.
We expect 0.6% growth in 2023, down from 7.3% in 2022. Despite 3% growth in 1Q23, tight monetary policy, weak private sector confidence, and elevated policy uncertainty point to a further activity slowdown as the year unfolds.
Vittorio Peretti Carolina Monzón