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Colombia GDP Q3 2023

Colombia: GDP unexpectedly drops in Q3 due to slump in inventories

GDP dropped 0.3% year on year in the third quarter, contrasting the 0.4% rise seen in the second quarter. Q3’s reading marked the worst result since Q4 2020 and was unexpected: The market had predicted an expansion. This could push the Central Bank to lower interest rates earlier than expected ahead.

The decline was driven by a slump in inventories. Inventories are volatile and are not necessarily representative of the underlying health of the economy; excluding them, GDP growth actually improved to 5.7% year on year in the third quarter from 4.1% in Q2. Exports of goods and services growth picked up to 4.1% in Q3 (Q2: +3.4% yoy). Conversely, imports of goods and services slid at a steeper pace of 21.7% in Q3 (Q2: -14.8% yoy), marking the lowest reading since Q3 2020, pushing up net trade in the process. Meanwhile, government spending sped up to a 2.4% expansion in Q3 (Q2: +1.6% yoy).

Nonetheless, despite the improvement in net trade and government spending, domestic demand weakened in the quarter, adding pressure on the Central Bank to lower interest rates in the coming months. Private consumption growth fell to 0.4% in Q3, marking the weakest expansion since Q3 2020 (Q2: +0.8% yoy). In addition, fixed investment plunged at the steepest rate in over two years, falling 11.0% in the third quarter (Q2: -7.7% yoy).

Meanwhile, on a quarter-on-quarter basis, economic activity bounced back, expanding 0.2% in Q3, contrasting the previous quarter’s 1.0% fall.

Our panelists expect muted GDP growth in the fourth quarter. While inventories are unlikely to slump as sharply as in Q3, preventing another contraction, domestic demand is likely to be weighed on by high inflation and interest rates. In addition, fixed investment should be knocked by ongoing political uncertainty. A key downside risk is the El Niño weather pattern, which could hurt agricultural output and, therefore, stoke price pressures ahead.

Santiago Tellez, analyst at Goldman Sachs, commented:

“Going forward, we continue to expect below-trend real growth on the back of tight domestic and global financial conditions and depleting excess households’ savings. Moreover, elevated policy uncertainty given the administration’s aggressive legislative agenda, together with weak business sentiment, are likely to impinge further on private investment.”

Credicorp Capital’s Daniel Velandia and Diego Camacho said:

“All-in, we are revising our GDP growth estimate for 2023 downward to 1.2%, down from our previous estimate of 1.3%. Additionally, we are adjusting our GDP growth estimate for 2024 to 1.7%, down from 2.2%, due to the following factors: i) a start of rate cuts later than initially planned, ii) inflation and policy rate that, on average, will be higher than previously estimated in 2024, iii) subdued private investment amid persistent political uncertainty and iv) an increased likelihood of a strong El Niño event.”

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