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Overall dynamics remained weak as tight monetary policy persists.
2023/11/14 | Andrés Pérez M., Vittorio Peretti, Carolina Monzón & Juan Robayo

Even though activity indicators posted a sequential recovery in September, overall dynamics remained weak in 3Q23. Retail sales contracted 9.3% YoY in September (10% down in August), larger than the Bloomberg market consensus and our call of an 8.5% drop. Core retail sales (excluding fuels and vehicles) increased 0.7% from August (MoM/SA; -0.8% registered in the previous month), leading to a 3.5% YoY decline (-5.5% previously). Meanwhile, manufacturing expanded 1.6% MoM/SA (-0.8% in August), leading to an 6.9% YoY decline (-8.5% previously), milder than the Bloomberg market consensus and our call of -7.5%. During the third quarter of the year, activity indicators continued to weaken, but with inflation still too high, and inflation expectations well above target, the bar to start the easing cycle next month in December remains high. We see rate cuts only in 1Q24. The coincident activity indicator and the national accounts data will be published on Wednesday.


Manufacturing levels remained low in the third quarter. Manufacturing fell 7.6% YoY in 3Q23, down from the 4.9% drop in the 2Q23. At the margin, manufacturing contracted 6.6% qoq/saar, building on the -7.6% in 2Q23. Manufacturing levels are now 9.9% above pre-pandemic levels, but have retreated from the near 18% peak during 3Q22. 


Retail sales continue to adjust downwards. During 3Q23, retail sales contracted 9.2% YoY, deeper than the 8.1% drop in 2Q23, while core retail sales decreased 4.3% (-5.6% in 2Q23). At the margin, core retail sales contracted 4.4% qoq/saar, adding to the 10.3% drop in 2Q23. Core retail sales now sit 10.8% above pre-pandemic levels (adjusting from the +24% peak at around mid-2022).


With a tight monetary policy stance set to persist, along with sticky inflation, activity should remain weak. We expect the economy to decelerate significantly this year to 1.0% (from 7.3% in 2022), and to grow by a below potential 1.2% next year.