Itaú BBA - COLOMBIA – Activity decline in March

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COLOMBIA – Activity decline in March

Maio 14, 2020

How economic activity unfolds will depend on the duration of the lockdown, its effect on the labor market and corporate balance sheets

Indicators for the month of March reflect the sudden deterioration of activity, following the onset of the coronavirus and oil shock, that will be exacerbated during 2Q20. Retail sales fell 4.8% yoy in March (+13.2% previously), a larger drop than the Bloomberg market consensus of -4.0% and our -2.0% call. The weakness comes as business operations closed in the final week of the month due to the mandatory quarantine to contain the spread of the coronavirus. Meanwhile, manufacturing underwhelmed with a contraction of 8.9% yoy (+4.5% previously) beyond the Bloomberg consensus of a 5.4% decline and our -5.0% forecast. After adjusting for seasonal and calendar effects, manufacturing retreated 9.6% yoy and 11.7% from February (the sharpest monthly decline since 2001). The data for the final month of 1Q20 points to a significant slowdown of GDP from 3.4% in 4Q19 to 2.2% (to be released tomorrow). Leading up to March, activity was increasing at close to 4%, highlighting the sudden activity turnaround. With the activity slump set to magnify in coming months, we expect the central bank to continue to implement liquidity measures to ease the functioning of the financial system and lower rates to lay the groundwork for an activity recovery once there is some normalization on the health front.

The manufacturing contraction in 1Q20 was the first such case since 4Q17. In the quarter, manufacturing shrunk 0.4% yoy, worsening from the 1.2% rise in 4Q19. Vehicle-related manufacturing was the key drag (23.1% down), while oil refining fell 0.9% in the 1Q20 (+1.9% in the 4Q19). At the margin, manufacturing fell 7.8% qoq/saar, significantly down from the 0.4% drop in 4Q19.

The acceleration of retail activity in the first two months of the year masks the disruption witnessed in March, leading to only a mild slowdown in 1Q20. The full impact of the dual shock will be evident in 2Q20. In the first quarter of the year retail sales grew 5.0% yoy (from 6.3% in 4Q19), pulled up by dynamic food sales (+17.2%; contributing 3.6pp). Meanwhile, apparel and fuel sales contracted 10.4% and 1.9%, respectively, subtracting a combined 0.8pp from retail activity. Excluding vehicle and fuel sales, retail moderated to 7.2% in the quarter from 9.1% in 4Q19. At the margin, core retail sales (excluding fuel and vehicle sales) declined 5.8% from February (the sharpest drop since late-2018), as the quarantine and elevated uncertainty likely led to a significant drop in demand for non-essential goods. For 1Q20, core retail sales fell 6.6% qoq/saar from the 4.2% gain in 4Q19.

How economic activity unfolds will depend on the duration of the lockdown, its effect on the labor market and corporate balance sheets. Given the turbulent environment, we expect a 4.7% activity drop this year (+3.3% last year), with the second quarter being the worst hit. 

Miguel Ricaurte
Carolina Monzón

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