The handbrake on the economy began to be applied from the first month of this year. Not surprisingly, the latest figures from the leading indicators reaffirmed the slowdown in growth motivated by private consumption that deepens its weakness. Thus, in January the fourth month of real annual contraction in consumption began as a result of the deterioration of financial conditions due to high inflation, higher interest rates and the high exchange rate.
It’s not unreal. If the Gross Domestic Product grew 8% in 2022, as expected by the markets, in 2023 the fall could be severe and reach up to 1%.
On the side of productive activity, the Economic Monitoring Indicator advanced between November and October, according to the series adjusted for seasonal effects. Specifically, the indicator grew 1.9% explained by the good performance in manufacturing and construction (+5.9%) and in the service sectors (+1.6%). However, for the third consecutive month the negative balance occurred in the agricultural and mining sector (-1.2%).
From the labor market, the incidence of unemployment increased notably during December. In this regard, the rate at the national level rose to 11.3%, in turn, at the urban level it rose to 11.6%. Such deterioration occurred every time that the balance from the employed was negative, while the pressure on the labor market increased.
In the external sector, exports registered their first annual contraction in December. Oil was the most relevant negative surprise. Coal and non-traditional products also recorded deterioration.
Interest rates
In its first meeting of the year, the Board of Directors of the Banco de la República (JDBR) increased the intervention rate by 75 points, such that it reached 12.75%. Although the new increase was justified by the upward surprise in inflation, the change in the magnitude of the movement of the rate from 100 (which prevailed in the three previous meetings) to 75 points, as well as the rationale of the co-directors who departed from the majority vote, are associated with the slowdown of the economy in the last part of 2022. In particular, this was evidenced in the new economic growth expectation for 2023 of the Issuer’s technical team, which went from 0.5% in the October update to 0.2% in the January update.
Inflation
In this sense, DANE reported that the consumer price index presented a month-on-month variation of 1.78% during January. With this, year-on-year inflation in Colombia stood at 13.25% in January 2023, the highest figure recorded since 1999. By sector, food and alcoholic beverages mark the upward trend in inflation, with a monthly variation of 1.76% and an interannual variation of 26.18%, which was the highest of all categories.
The general manager of Banco de la República, Leonardo Villar, referred to this phenomenon, which has Colombians in economic trouble, in his speech at the Treasury Congress of the Colombian Banking and Financial Institutions Association (Asobancaria). .
He indicated that the inflation figure for food is particularly high when taking into account that in January 2022 the prices of these were already growing at a rate of 19.9%. According to him, this means that in the last two years the level of food prices increased by more than 50%, which implies an increase in the relative price of this item of the family basket considerably greater than what can be explained by global factors.
The general manager of the Banco de la República said that basic inflation, defined as that corresponding to the basket that excludes food and regulated items, shows an index of 9.78% in January, that is, it grew 25 basic points with respect to the one that was observed in December.
Exchange rate
The Colombian peso started the year as one of the strongest currencies in emerging markets, registering an appreciation of 3.7%. In fact, the dollar managed to quote in the area of $4,500, which represented a correction of $590.5 compared to the all-time high observed in November, driven by a favorable international context.
In fact, the main catalyst for this dynamic was the evolution of prices at the international level in view of the continuous signs of moderation. In particular, the Personal Consumption Expenditure (PCE) price index in the US registered an advance of only 1.0% in December, such that it positively surprised the consensus of analysts.
Therefore, the market assumed a 25-point adjustment at the Fed’s first meeting and would be incorporating a rate cut in the second semester into its expectations. For this reason, the dollar has weakened globally, losing its role as a refuge asset. Meanwhile, in Colombia the debate around the flagship reforms promoted by the current government has revived an atmosphere of uncertainty. As these proposals advance through the Congress of the Republic, the scope will be known and the market will begin to discount the impacts.
For financial market analysts, uncertainty in the local context would translate into a weakening of the dollar, which would average $4,750 in the first quarter. On the contrary, favorable financial conditions would be conducive to closing the year around $4,700.
Growth
On the other hand, in the November 2022-January 2023 quarter, economic activity expanded at an estimated annual rate of 3%, 30 basis points less than what was calculated for the fourth quarter of 2022. In this way, the moderation in the growth that has prevailed in recent months.
All of this is consistent with the fact that the seasonally adjusted series shows that the economy contracted 0.1% in January compared to December levels., a month in which it had presented a slight rebound. In year-on-year terms, the specific variation in January was 3.6%, almost 1 point more than that of the previous month. In addition, during January there was evidence of better relative performance in the real estate and agricultural sectors, while professional services, public administration, recreation and communications presented less dynamics. For its part, construction continues to show a marked slowdown.
On the other hand, the GDP variation projections for the first quarter show an annual 0.9%, a figure lower than the average expectation of analysts. This signal represents a downward risk for the result for the full year, since in our base scenario (0.9% annual) the highest growth would occur in this quarter.
producer prices
The Producer Price Index (IPP) measured by DANE showed a month-on-month increase of 0.76%, six times lower compared to the 5.09% increase that it presented in January 2022.
This lower pressure was also seen in the annual data for the indicator, which fell to 16.79% after the data of 21.81% in which it was located in December 2022. Likewise, the annual variation of the PPI shows a difference of 12 0.65 percentage points compared to the data for January 2022, which showed an increase in producer costs of 29.44%.
It is worth remembering that the PPI presents the average price variation of a basket of goods representative of national production and imports and that this indicator, according to DANE, is part of the tools “for the detection of inflationary transmission channels”, since it allows studying the behavior of prices from the moment they enter the marketing channels.