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Colombia: retail sales and Industrial production disappointed in May-17


July 14, 2017 ( Newswire) Total retail sales fell for the fourth time this year in May-17 (-0.5% y/y), below the expected by the market consensus (+1.2%) and our estimate of +1.7%. Moreover, industrial production dropped -0.6% y/y, also surprising us and the market consensus to the downside (+2% and +1.2%, respectively). The negative performance of both samples occurred despite the positive calendar effect of May-17 having 21 working days vs 20 in May-16. Indeed, the seasonally-adjusted (s.a.) series of industrial production posted a stronger annual decline than that of the original series, although the one of retail sales reached positive ground. Overall, while still weak activity poses risks to our long-held 2.1% estimate for 2017 GDP growth, it is worth to mention that both retail sales and industrial production have accelerated in 2Q17 vs 1Q17. Considering the still widespread weakness of economic activity and the downward surprise of inflation in Jun-17, we expect the BanRep to continue with its easing cycle this month, while we still see the terminal rate at 5.25% this year (2018: 4.75%) with the risks balance tilted to the downside.

Retail sales remained subdued in May-17 although an improvement on the margin was observed. Retail sales dropped 0.5% y/y in May-17, above the YTD average of -1.4%, while excluding fuels and vehicles sales fell 0.9% y/y. Moreover, the s.a. series (without fuels) increased 0.2% (-0.4% m/m), and the one that also excludes vehicles advanced 0.3% y/y (-0.1% m/m). The overall negative performance of retail sales in May-17 was driven by the drop of vehicle spare parts (-4.4% y/y), and hardware items (-10.3% y/y), while home appliances (+4.5%) continues to post a remarkable resilience. Moreover, food and non-alcoholic beverages sales stood as the top performer for the second straight month (2.6%), as it contributed +0.6pp to the headline figure.

While retail sales continue to post low dynamics given its still weak fundamentals, an improvement has been observed on the margin. Specifically, the s.a. series averaged -0.3% y/y in 1Q17, while the Apr/May-17 average stands at 0.6% y/y. Thus, we expect retail sales to continue improving in the coming months once the impact of the increase in the VAT and other consumption taxes fades, which will be supported also by the ongoing boost in households’ real income given the convergence of inflation towards BanRep’s target (which in fact now stands at 3.99%, within the target range for the first time since Jan-15).

Industrial production has fallen in four out of five months this year. May-17 figure of -0.6% y/y stood below the expected by the market consensus and us, while the s.a. series slid 1.1% y/y as May-17 had one additional working day than May-16. Oil refining activities decelerated sharply once again, reaching +0.6% y/y from 8.4% in Apr-17. Relatively strong performances were observed in manufacturing of paper and paperboard (9.8% y/y; +0.3pp), and production of dairy products (8% y/y; +0.3pp). Moreover, positive variations were observed in 16 out of 39 sectors, with just 4 of those reaching double digit growth rates.

Thus, the overall industrial sector remained weak, in line with the observed in recent quarters. In any case, we believe that industry will recover at a gradual pace ahead, as a positive effect would be observed from current FX levels, the cut in corporate taxes approved in the recent fiscal reform, and the expected improve in the external demand. Indeed, the s.a. series averaged -2.6% in 1Q17, while the Apr/May-17 average stands at +0.5%.

For charts, tables and the full report, see the attached file.

Daniel Velandia, CFA
+ (571) 3394400 Ext. 1505

Camilo Durán
+ (571) 3394400 Ext. 1383

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