Colombia’s downturn worse than we feared - Capital Economics
Latin America Economics

Colombia’s downturn worse than we feared

Latin America Economics Update
Written by Quinn Markwith

The weaker-than-expected Q1 GDP figure, coupled with signs that Q2 is shaping up to be worse than we had initially thought, has prompted us to revise down our estimate for the fall in Colombian GDP this year. We now expect a contraction of 7.0%.

  • The weaker-than-expected Q1 GDP figure, coupled with signs that Q2 is shaping up to be worse than we had initially thought, has prompted us to revise down our estimate for the fall in Colombian GDP this year. We now expect a contraction of 7.0% (previously 5.0%).
  • The sharp fall in Colombian GDP growth, of 2.4% q/q in Q1, confirmed that the spread of the coronavirus dealt a blow to economic activity in March. The ISE monthly GDP proxy (which has a strong relationship with the quarterly national accounts figures) contracted by 8.3% m/m in March. This may in part be explained by the conditions of Colombia’s lockdown, which are particularly stringent. (See Chart 1.) But mobility data from Apple show that activity started to weaken significantly prior to the start of the lockdown on 24th March. (See Chart 2.)
  • The breakdown of the GDP data is of limited use given that it covers the whole quarter. But the production breakdown of the ISE monthly data for March provides more insight. It reveals double digit y/y falls in the retail, entertainment, and industrial sectors, including the key mining sector. (See Chart 3.)
  • A much deeper contraction is likely in Q2. The latest manufacturing PMI and consumer confidence surveys (see Chart 4) point to steeper falls in activity in April. Although the government started to relax the lockdown in May, policymakers suggest that this will only get “60-70% of GDP functioning” by June. And the Apple mobility data suggest that routing requests are still 50% below normal levels. (See Chart 2 again.)
  • Lower oil prices present a further downside risk to the economy, as they reduce export and government revenues. The government’s fiscal response has been slow. And, despite the recent guaranteed minimum income plan, much of the economic damage will have already been done in April and early May. We are sceptical about the prospects of a speedy recovery later in the year even once the virus is under control.
  • For now, we estimate that GDP will contract by around 14% q/q in Q2. And we are revising down our 2020 GDP growth forecast from -5.0% to -7.0%. The scale of the hit to GDP will likely force the government to do more to support businesses, which would exacerbate fiscal vulnerabilities.

Chart 1: Oxford University COVID-19 Government Response Index

Chart 2: Apple Maps Routing Requests*
(Index, 100 = 13th January)

Chart 3: Economic Activity by Production (% y/y)

Chart 4: Consumer Confidence & Manufacturing PMI

Sources: Refinitiv, Oxford University, Apple, Davivienda, CE


Quinn Markwith, Latin America Economist, quinn.markwith@capitaleconomics.com