Colombia Growth Could Pick Up in 2017-18

The Colombian economy has been struggling to tackle the political instability that has resulted from the insurgence of the Revolutionary Armed Forces of Colombia and similar groups for more than a decade. However, the recent peace agreement, which was signed last August between FARC and the Colombian government, has turned a new page in this region.

Many believe that this positive development will favorably impact economic growth in Colombia in the coming years due to reduced instability, Marketrealist reported.

In the most recent quarter (Q1), Colombia’s GDP rose 1.1% year-over-year, lower than the 1.6% growth in the previous quarter. The first quarter economic growth in Colombia remained below market expectations. The output fell in some sectors including trade, repairs, hotels and restaurants, transport, communication, mining, construction, and utilities.

The growth slowed in finance, insurance, real estate activities, and manufacturing. However, the agriculture, hunting, forestry, and fishing sectors advanced sharply in Q1. The recent tax reforms seem to have affected economic activity in in Q1.

The Colombian economy has been struggling with fiscal issues related to tax administration, resulting in lower government revenues over the last few decades. The government recently initiated tax reforms that affected household spending in Q1. Consumer spending dropped slightly to 88,182 billion Colombian pesos ($28.54 billion) from 88,479 billion in Q416. As a result, most sectors registered declines in activity in Q1.

According to the IMF report on May 31, the implementation of a peace agreement in the Colombian conflict is expected to foster infrastructure development and basic services. The economic growth is expected to be at 2.3% and 3% for 2017 and 2018, respectively.

The Central Bank of Colombia has reduced its economic growth expectations due to the tax reforms, which are likely to impact economic activity in the next few quarters. The central bank expects to see economic growth in this Latin American economy in the range of 2.0% to 1.8% for 2017.

The annual consumer inflation in Colombia has dropped for 12 consecutive months as of June 2017. The consumer prices rose at 4% on a year-over-year basis in June 2017 as compared to a 4.4% increase in May 2017. The slower pace of increase in most of the inflation components resulted in a more gradual rise in June 2017.

The Central Bank of Colombia cut the key interest rate by 50 basis points to 5.8% on June 30, 2017. The rate cut surprised markets, which had anticipated a 25-basis-point cut. The downward trend in inflation has resulted in a sharp reduction in interest rates this year.