Bancolombia Projects Colombian GDP to Grow by 2.5% in 2018

In a departure from several international financial organizations predicting higher growth, Bancolombia this week issued a forecast that Colombian gross domestic product (GDP) will only increase by 2.5% in 2018.

While still significantly higher than the 1.6% growth that the Medellín-based bank estimates Colombia experienced in 2017, this is below the 3.0% projected by the International Monetary Fund (IMF) and the 2.9% forecast by the World Bank. Even the more pessimistic Colombian central bank (Banco de la República) has set its expectations at 2.7% growth this year.

“We expect the manufacturing industry and retail to gain traction in 2018 … Construction would return to positive territory driven by civil works. Mining would be favored by the good moment of global growth.“ – Bancolombia

Regardless of the disparity, in its analysis, Bancolombia has highlighted the positive factors that will lead to improvements this year, including higher commodities prices, improved household consumption, and a more balanced economic growth across various sectors.

“We expect the manufacturing industry and retail to gain traction in 2018,” wrote Bancolombia in its analysis. “Retail would go from growing 0.7% in 2017 to 2.3% in 2018. Construction would return to positive territory driven by civil works. Mining would be favored by the good moment of global growth.“

Bancolombia also projects household consumption to jump from 1.6% growth in 2017 to 2.6% in the year ahead, while unemployment will average 10.9% and the currency exchange rate will average 2,935 pesos to the U.S. dollar.

Higher oil prices will be a large factor in driving recovery. Bancolombia predicts that the per-barrel price of oil will average $57 USD in 2018, up by more than $6 USD from its prior expectations. Though “volatility will remain high” the bank says that “the good performance of the developed economies and the foreseeable reduction in inventories will allow prices to be maintained in the short term.”

These, and other factors — including higher-than-expected oil prices, more private investment, increased exports and a faster recovery in construction — have also led Bancolombia to set its most-optimistic outlook for GDP growth at 3.3%. While this is balanced on the low end by a worst-case possibility of 2.1%, Colombia’s largest bank believes that the second half of the year, after the congressional and presidential elections are complete, will show better results than the initial six months of 2018.

Capital Economics Forecast: 2.5% Growth

One other analyst group that agrees with Bancolombia is the London-based Capital Economics. In an analysis released this week, it projected the same 2.5% GDP growth for Colombia in 2018.

The research firm cites also higher oil prices — predicting the per-barrel price to be 5% above the 2017 average — as a key factor that will drive growth this year. Better returns will lead to more investment from the sector as well as increased output, according to Capital Economics.

Amid the recovery, the organization also sees lower inflation and interest rates spurring more consumer spending and better credit conditions. Moreover, the government is likely to take a less severe stance regarding the austerity plan it has been operating under for in recent years.

READ MORE: IMF Projects Colombian GDP to Grow by 3.0% in 2018

“The budget deficit narrowed from a peak of over 4% of GDP in 2016 to 3% of GDP last year as the government reined in spending and hiked the VAT rate,” stated Capital Economics. “While the government’s 2018 budget envisages another year of fiscal austerity, the size of this year’s fiscal squeeze (equivalent to 0.5% of GDP) will be smaller than last year’s (about 1% of GDP).”

And in the eyes of Capital Economics, this will be the case regardless of who takes over as president in the mid-year election. While the leading candidates have conflicting campaign positions on key economic policy areas, the differences are unlikely to prove material in terms of the nation’s overall trajectory.

“Ultimately, we do not think any would mark a significant departure from Colombia’s relatively market-friendly economic policies,” stated Capital Economics.

Photo: Bancolombia headquarters in Medellín, Colombia. (Credit: Juan Camilo Trujillo)