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#Colombia Flash - Retail sales and industrial production disappointed in Aug-17, signaling that activity remains sluggish


October 13, 2017 ( Newswire) After recording two consecutive months of expansion, retail sales fell by 1.2% y/y in Aug-17, below market consensus (+1.3%) and our own forecast (+1.9%). For its part, industrial production contracted by 3.1% y/y, surprising the market to the downside (-1.0%) but coming in above our estimate (-4.5%), adding up six months in negative ground so far this year. Recall that industry grew by 6.3% y/y in Jul-17 due to a favorable statistical base. Importantly, both sectors declined in seasonally-adjusted terms (retail: -0.2% y/y - the first contraction since Feb-17; industry: -0.9% y/y), pointing towards a still sluggish activity.

While we continue to project that GDP growth will accelerate in 2H17 vs 1H17 (1.2% y/y), this new information poses downside risks to our 1.9% estimate for the whole year. Particularly, industrial production is expected to recover only gradually whereas retail sales will face an unfavorable statistical base in 4Q17 due to both the traditional 'car festival' in Bogotá that is held every two years and the 'anticipation' effect observed a year ago ahead the VAT hike. In fact, we highlight that the MoF affirmed this week that 2017 GDP growth will be in the 1.7%-2.0% range vs the previous official forecast of 2%. Having said all this, we expect a stronger dynamism of activity next year amid lower inflation, interest rates, and taxes for corporates, as well as a better behavior of main trading partners. Main downside risks to activity next year would come from the possibility of investment decisions postponement by firms in the middle of an electoral year (see 2018 presidential elections: too early to say. In any case, we expect no changes in the economic model, 03-Oct-17).

On the monetary policy side, the ongoing disinflation process in core measures -in addition to the recent downward surprises in the headline figure-, and the presence of risks to growth, may imply that the BanRep could resume the easing cycle before 1Q18 (still our base case). For now, we continue to think that the BanRep will prefer to be conservative and remain on hold this month.

Retail sales scaled back in Aug-17. Despite the strong reduction in inflation so far this year and the recent improvement in consumer confidence, retail sales contracted for the first time in the last three months, even in s.a. terms. Excluding fuels and vehicles, sales fell 0.3% y/y. The reduction was driven by car spare parts (-8.6% y/y), autos (-3.5%), and personal care products (-4.9%). Conversely, food and non-alcoholic beverages (+4% y/y), home appliances (4.0%), and alcoholic beverages (7.8%) posted the highest expansions. Ahead, an unfavorable statistical base due to the car festival last year and the anticipation effect ahead the VAT hike will entail pressures on the retail sales figures.

After posting a strong increase last month due to an one-off favorable base effect, industrial production went back to negative ground in Aug-17. This time, negative variations were observed in 29 out of 39 subsectors, with grain mill products and starches (-14.6% y/y), oil refining (-1.9%), auto production (-23%), and non-metallic mineral products (-4.3%), jointly subtracting 1.2pp from the total production figure in Aug-17. We expect a gradual recovery of manufacturing in the upcoming quarters amid a better external backdrop, lower corporate taxes, and a recovery in domestic demand following the negative effect of the VAT hike this year.

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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