GDP growth accelerates in Q1 but fails to meet market expectations

GDP growth gathered pace to 0.7% year on year in the first quarter from 0.3% in the fourth quarter of last year. Q1's reading marked the best result since Q1 2023 and beat Banrep’s forecast of 0.3% growth. On a seasonally adjusted quarter-on-quarter basis, economic growth picked up to 1.1% in Q1, compared to the previous period's 1.0% expansion. Q1's reading marked the strongest expansion since Q2 2022. That said, both figures fell short of market expectations.

Household spending rebounded, growing 0.6% year-on-year in the first quarter (Q4 2023: -0.8% yoy), which marked the best reading since Q2 2023. Moreover, fixed investment contracted at a softer rate of 6.5% in Q1 from the 14.1% decrease recorded in the prior quarter. Less positively, government spending swung into contraction, falling 0.7% in January–March (Q4 2023: +4.0% yoy). On the external front, growth in exports of goods and services slowed to 0.7% on an annual basis in the first quarter (Q4 2023: +6.7% yoy), as goods exports fell deeper into contractionary territory. Conversely, imports of goods and services declined at a softer pace of 12.9% in Q1 (Q4 2023: -14.1% yoy).

Annual GDP growth is likely accelerating in Q2 and appears set to gain further steam in the second half of 2024, though largely on a low base of comparison. Household consumption and investment will accelerate, with inflation set to average below its January–March level through December and Banrep on track to reduce interest rates by approximately 400 basis points by year-end.

Credicorp Capital’s Daniel Velandia and Diego Camacho Alvarez commented on the outlook: “We expect public expenditures to be a key driver of economic growth this year. Private consumption is also anticipated to improve in the second half of 2024 due to lower inflation and interest rates. While investment may benefit from a favorable comparison to the previous year's data, a clearer regulatory environment will be crucial for a faster recovery in this area.” Santiago Tellez, analyst at Goldman Sachs, added: “We still view activity as facing several headwinds: tight domestic and external financial conditions, lacking public infrastructure projects, and heightened policy uncertainty stemming from fiscal slippages risk, the administration’s legislative and policy agenda, and regulatory instability. Conversely, activity may be partly boosted by resilient external demand and strong workers’ remittances. The underperformance of fixed investment remains the main downside risk to our growth forecast.”

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