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Low savings and little investment: Vicious cycles in the Colombian economy – news

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Low savings and little investment: Vicious cycles in the Colombian economy – news

The pandemic did not generate a structural change in the level of household savings or consumption; in 2023 it returned to the historical trend.

The Colombian economy is characterized by high levels of consumption and low savings. There is a vicious cycle in which households do not save, investment is low and the growth of the productive apparatus stagnates in the face of this reality, says an economic commentary by ANIF and Bancolombia.

During the pandemic, an increase in household savings was observed (the highest level in recent years) as a result of widespread lockdowns. In 2021, with the reopening and the worst of the health emergency over, consumption boosted the economy, households spent that excess savings and consumed more than normal. Thus, the gross savings of the economy were reduced to their minimum levels.

During 2023, a decrease in consumption was observed as a result of inflation and the restrictive monetary policy of the Bank of the Republic. Savings recovered a little compared to the post-pandemic years, but a structural change was not seen in the economy’s savings, as it returned to its pre-pandemic levels. It is even clear that high interest rates did not lead to a significant increase in household savings. When consumption is high, savings are small and therefore domestic investment is also low.

Total investment, foreign and domestic, generates gross capital formation and expands the country’s productive capacity. Colombia must seek an increase in its level of savings, which allows the reduction in financing costs and the development of the capital market.

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In 2023, GDP growth was 0.6%, investment, for its part, fell 8.9% throughout the year. An explanation for this poor performance may lie in our sensitivity to interest rates, which when they increase not only discourage household consumption decisions, but also affect the investment decisions of companies.

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