After Colombia experienced a strong year for economic growth in 2012, some experts have expressed more caution toward the country’s growth prospects for 2013.
“I don’t think the government will meet the goals they’ve set for 2013 in terms of economic growth,” University of the Andes Professor of Economics Marc Hofstetter told Colombia Reports.
The Colombian government has set a GDP growth target of 4.8% for 2013. Colombia’s output (GDP) in 2012 was $365.4 billion, up from $327.6 billion in 2011.
In 2011 there had been substantial concern over to what extent consumption was being fueled by high levels of unsustainable household debt. However, recently the central bank has said that household debt levels are converging on “a path toward sustainability”.
Now the focus has shifted to what will happen in the case of a cool down for the emerging natural resource-rich economy.
“The worry now is that the economy will slow down and [lead to an] increase [in] unemployment,” said Hofstetter. Colombia’s unemployment rate, historically one of the highest in Latin America on a regular basis, reached 12.1% at the start of 2013 – higher than its neighbor Venezuela.
Colombia’s central bank, evidently sharing such concerns to some degree, met in mid-February and decided to drop the interest rate down to 3.75%: the sixth cut since June of 2012. The bank made its decision largely in response to high levels of household consumption, a sluggish civil works sector, and the slump in GDP growth in the third quarter of 2012.
MORE: Colombia lowers interest rates 3.75%
Jorge Bello, researcher at brokerage firm Acciones y Valores, has been paying particularly close attention to potential backlashes from 2012’s sudden growth. “We’re watching the industrial sector carefully. Right now the biggest concern for us is that sectors like manufacturing will slow severely,” he explained. Colombia’s industrial sector contributed more than 25% to the country’s GDP in 2012.
Analysts expect more rate cuts by the bank this year. If the rate does drop again, analysts believe that the central bank will have to keep an eye on external market factors that could send its currency soaring again, and further affect an already shaky industrial sector. Factors such as the eurozone crisis, the consequences of Colombia’s free trade agreements, and Venezuela’s currency devaluation have all come under close scrutiny by the bank.
Finance Minister Mauricio Cardenas nevertheless has kept a steady cool about the country’s economic outlook. Cardenas recently said that Colombia has entered “a phase of low inflation” that makes the economy ripe for policy makers to stimulate economic growth.
According to Hofstetter, the bank has taken the right measures to maintain the economy’s vitality, but adds that the bank could push those policies further than it currently is.
“The central bank will likely continue to reduce the interest rate and continue purchasing dollars,” said Hofstetter. “They could, however, be more aggressive than they are.”
Sources
- Interview with Marc Hofstetter (Professor of Economics at The University of the Andes)
- Interview with Jorge Bello (Researcher at Acciones y Valores)
- Colombia yields plunge on Fitch outlook, rate view; peso gains (Bloomberg)
- Economic Acceleration and Structural Reforms (Banco de la Republica – Colombia Central Bank)
- Output, prices, jobs (The Economist)
- GDP Historical Data and Forecasts (International Monetary Fund)
