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The import and investment contractions reflect weaker domestic demand.
2023/08/15 | Andrés Pérez M., Vittorio Peretti, Carolina Monzón & Juan Robayo

Colombia’s economy contracted sequentially in 2Q23, with a clear weakening of domestic demand. The economy contracted 1.03% (SA) from 1Q23 to 2Q23, leading to a 0.3% YoY rise (3.0% in 1Q23). Annual growth in the quarter was below the Bloomberg market consensus of 0.4% and our 0.7% forecast. In annual terms, the moderate rise in annual GDP was driven by public consumption. Gross fixed investment contracted sharply sequentially at 5.3% (SA), and imports fell by 7.6% (SA). By economic sectors, activity was pulled up by entertainment and public administration, while dragged down by manufacturing and construction. At the margin, the monthly coincident indicator shows that activity rise at 1.1% MoM/SA during the final month of the quarter, building on the 0.6% expansion in May, despite weak retail and manufacturing prints. The evident activity slowdown and the gradual inflation correction lead us to believe the easing cycle is penciled in for 4Q23, with the policy rate falling to 12.25% by yearend. 



Construction and manufacturing contracted in 2Q23. Entertainment services rose at a double-digit pace again from 2Q22 at 12.2% (18.9% in 1Q23), alongside public administration that growth by 4.5% (1.9% in 1Q23). Meanwhile, manufacturing contracted 4.0% (+0.9% in 1Q23) and construction fell 3.7% (-3.5% in 1Q23). Overall, natural resources rose slightly by 0.6% YoY (+2.2% in 1Q23), similar to non-natural resource activity that increased a mild 0.3% YoY (+3.1% previously).


Investment contracted sharply, while the import contraction reflects weaker domestic demand. Gross fixed investment decreased by 7.8% YoY (-0.9% in 1Q23), while total investment contracted by 24.0% YoY, well below from the -8.0% registered in 1Q23. On the other hand, public consumption countered the economic deceleration, with an annual growth of 2.5% YoY (-0.7% in 1Q23), reflecting that activity dynamics were supportes by government spending, while private consumption expanded by 0.7% (+3.1% in 1Q23). Exports rose by 2.4% YoY (2.7% in 1Q23), while imports contracted sharply by 14.5% YoY (from the -7.3% in the 1Q23), signaling a weakening of domestic demand.


At the margin, activity contracted 4.1% qoq/saar, down from the +9.19% in 1Q23. The contraction in gross fixed investment (-19.6% qoq/saar, from -12.1% in 1Q23), was countered by an increase in public consumption of 23.2% qoq/saar, below the 35.2% in 1Q23. Exports remain strong (+11% qoq/saar), while imports contracted deeply by 27.04% qoq/saar. The monthly coincident activity indicator (ISE) increased 1.1% from May to June (SA), lifted by public administration and financial and insurance services.


We expect a sharp deceleration in economic activity to 1.3% in 2023, down from 7.3% in 2022. The sequential contraction in 2Q23 reflects tight monetary policy, the correction in domestic demand, and weak private sector confidence.