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Colombia: Retail sales and industrial production are being pushed by a favorable statistical base, although they came in below estimates in Feb-18


April 16, 2018 ( Newswire) Activity leading indicators continued to post relatively high annual growth rates in Feb-18, although they came in below expectations. Specifically, retail sales rose 5.0% y/y in Feb-18, slightly decelerating from Jan-18 (5.2%), while standing below both the market consensus estimate (+5.7%) and our own forecast (+9.5%). Industrial production came in at +1.5% y/y, improving from 0.8% y/y in Jan-18 and standing broadly in line with the consensus (1.6%), though this entailed a downside surprise for our estimate (2.8%). While these figures suggest at first glance that economic activity entered 2018 with strong momentum, it should be recalled that a very favorable statistical base is playing a key role, as in early-2017 the 3pp VAT hike came into force. In Jan/Feb-17, retail sales and industrial production dropped by 4.2% y/y and 1.6% y/y, respectively. In fact, the monthly growth of the seasonally-adjusted series of both samples came in weak, which signals a still low dynamism of overall economic activity in early-2018, as expected by us considering the uncertainty surrounding the presidential elections to be held in May/Jun-18. That said, Fedesarrollo published the consumer confidence of Mar-18, which reached its highest level since Sep-16. Finally, the performance of the leading indicators in Feb-18 supports the call of a 25bp rate cut by BanRep in this month’s meeting, in our view.

The annual figure for retail sales was strongly favored by a soft statistical base, while the seasonally-adjusted (s.a.) series dropped for the second time in three months. Just as in Jan-18, the positive statistical effect was mainly explained by the vehicles group, which dropped 11.5% y/y in Feb-17 while it grew 12.2% y/y this month, contributing 1.2pp to the headline growth. Another strong performance was seen in foodstuffs and non-alcoholic beverages (+9.2% y/y; +2pp). Thus, sales ex-vehicles-and-fuels rose 5.4% y/y, the strongest performance since Apr-16. Moreover, it should be noted that in Mar-18 there will be a negative calendar effect considering that in 2017 Easter holidays were carried out in March vs in April this year, which entailed three less working days in Mar-18 vs Mar-17.

Furthermore, we highlight the weak dynamics of the s.a. series, which fell 3.1% m/m (ex-fuels), while the ex-vehicles-and-fuels s.a. gauge dropped 0.9% m/m. These series have been volatile over the past months, as both reached 7-year record-highs in Jan-18. In any case, we expect overall private consumption to accelerate ahead in the midst of improvements on the inflationary front (3.14% in Feb-18, the lowest level since Sep-14) and the steady advance of consumer confidence. Thus, household spending should be a prime source of acceleration of GDP growth in 2018 amid higher disposable income given the ongoing disinflation process and the higher-than-expected hike in the minimum wage.

Consumer confidence jumped in Mar-18. The consumer confidence index of Fedesarrollo advanced in Mar-18, reaching -2.3% from -7.8% a month ago, reaching its highest level since Sep-16, though accumulating 27 months in negative ground. In any case, this level stands 17.9pp above the observed a year ago. The monthly advance was mostly explained by the relevant improvement of the expectations sub-index (+6.3pp to -0.3%), while that of the current conditions rose 2.3pp to -7.4%. We believe that the improvement of consumers’ expectations is closely related to the local political backdrop, as the Congressional and primary elections were held in Mar-18, when the right wing received a solid support (see note).

ndustrial production was also backed by a favorable statistical base. As observed during the past several quarters, refining activities continue to be the main driver of overall industrial production, growing 4.7% y/y and contributing 0.9pp to the headline figure in Feb-18. However, industrial production ex-refining reached positive ground for the first time since Jul-17 (+0.8% y/y), though this growth was pushed by the favorable statistical base as this series dropped 5.4% y/y in Feb-17. Conversely, the s.a. headline series fell 0.4% m/m, its second consecutive monthly drop. Overall, the local industrial sector continues to post anemic dynamics despite the structurally higher FX rate and the positive external backdrop marked by stronger growth of the main trading partners. This would be explained by the historical dependence of the sector to Venezuela, sluggish domestic demand, and the linkage to capital goods imports costs, so there is no clear effect of the weaker COP. Industrial production will also be hit by a negative statistical base in Mar-18 given the Easter celebrations.

All-in, the data of economic activity support our view of the BanRep cutting the repo rate to 4.25% in this month’s meeting. In any case, the stronger arguments behind this call are related to the inflationary dynamics so far this year (see note), as the headline figure inched closer to the 3% target in Mar-18, reaching 3.14% amid favorable contributions from the core measures.

For charts, tables and the full report, see the pdf file

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

Camilo Durán
+ (571) 3394400 ext. 1383

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