Medio: Economist Intelligence Unit - Business Latin America

Despite a sharp downturn in construction, consumer and manufacturing confidence remains buoyant Driven by the outstanding performance of mining and oil extraction and supported by a strong internal market, the Colombian economy grew by 4.5% year on year during the Second quarter. Although this represents a continuation of the economic recovery which began in the Second quarter of 2009, an unexpected contraction in the construction sector (down by 5.6% year on year) prevented stronger growth and left Colombia well behind the regional leaders at the half-year, Brazil (8.7%), Peru (10.1%) and Chile (6.3%), which have been on a remarkable path towards a consolidated recovery.

The contraction of Colombia’s construction sector was almost entirely attributable to a 16% fall in private construction (commercial buildings and housing), which was partly a result of the liquidation of real-estate stock that had accumulated during the previous two years. Base effects also played a role, as construction growth was exceptionally strong in the Second quarter of 2009, at 18.3%.

Since external conditions remain relatively unfavourable, reflecting mainly a slow recovery in developed countries and the trade block imposed by Venezuela, a big part of the recovery of the manufacturing sector, which posted growth of 8.4% year on year, has been driven by the dynamism of the internal market. Indeed, demand-side data from the Departamento Administrativo Nacional de Estadística (DANE, the national statistics bureau) show that total consumption continued to rebound steadily, growing by 3.8% year on year in the Second quarter. According to Fedesarrollo, a think-tank, consumer confidence has risen in recent months to above 2007 levels (when domestic demand grew by 8.6%). Additionally, consumption of durable goods jumped by 19.4% year on year in the Second quarter.

Unemployment edges down

The Economist Intelligence Unit believes that Colombia’s economic expansion will remain relatively stable during the Second half of the year, at least in part owing to the fact that the decline in construction is expected to be a one-off occurrence. Both the rate at which construction licences are being requested (up by 20% year on year) and the demand for housing credit (22.5%) remain high. Aggregate demand is also set to rise as unemployment recedes gradually—the unemployment rate fell to 11.2% in August 2010, compared with 11.7% a year earlier. Retail sales continued to rebound in July, rising by 13.8% year on year.

Nonetheless, the weakening of external conditions and its impact on manufacturing and exports will weigh on overall growth over the remainder of 2010. The downward revision of first-quarter GDP growth (from 4.4% to 4.2%) and the slightly weaker than expected Second-quarter performance have led us to lower our 2010 GDP forecast slightly to 4.4%.

Manufacturing recovery softens

According to DANE estimates, manufacturing production grew by just 0.2% year on year in July, suggesting that the industrial recovery is easing. This result is down sharply from growth of 3.7% year on year in the first quarter and 7.8% in the Second quarter. The July slowdown was caused mainly by weak production in sectors in which exports play an important role, such as sugar and beverages (down by 30.9% and 13.2% year on year, respectively) or by sectors that compete with imported goods, such as electrical appliances (down by 19.4%).

These results suggest that the heavy trade restrictions which are still being imposed by Venezuela and the strength of the peso are having a negative impact on industrial manufacturing growth.

Nevertheless, the sharp slowdown may prove to be somewhat of an outlier. Some recent surveys show that sentiment among manufacturers remains high. According to the Encuesta de Opinión Industrial Conjunta (EOIC, the Manufacturers’ Opinion Survey) manufacturers are still optimistic. The EOIC findings show that 61% of manufacturers surveyed consider that the business climate they are facing is “good”, which is 10 percentage points higher than in July 2009.

Furthermore, 86.2% of manufacturers believe they are experiencing high or normal levels of sales. This is significantly higher than the 71% for these categories recorded one year ago.

Improving relations with Venezuela, some expected currency easing before the end of the year and strong industry confidence point to a continued, albeit slightly weaker recovery of the manufacturing sector.

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