Latam Daily: Colombia Manufacturing and Retail Sales Recap; Peru Finally Sees Growth

• Colombia: Weaker than expected start in 2024 for Manufacturing and retail sales as both posted eleven consecutive months in negative territory

• Peru: Growth! Finally!

COLOMBIA: WEAKER THAN EXPECTED START IN 2024 FOR MANUFACTURING AND RETAIL SALES AS BOTH POSTED ELEVEN CONSECUTIVE MONTHS IN NEGATIVE TERRITORY

On Friday, March 15^th, the National Statistics Institute (DANE) published the manufacturing and retail sales data for January 2024. Real manufacturing output contracted 4.3% y/y in January 2024, less than Scotiabank Colpatria’s forecast, but above Bloomberg analysts’ expectations (-3.5% y/y and -5% y/y, respectively). As for real retail, sales fell 3.9% y/y in January, well below market expectations (-2.4% y/y) and our estimate (-3.2% y/y). This points to a slow start to the year for manufacturing and retail sales, posting eleven consecutive months of contraction in both sectors. On the manufacturing side, apparel, non-metallic mineral products, and iron and steel were the main negative contributors to the January result. On the retail side, a decline was recorded in the sale of clothing and the sale of motor vehicles and parts, demonstrating that the consumer’s demand for durable and semidurable goods remains low.

At the margin (seasonally adjusted basis), results were mixed. The manufacturing sector contracted slightly by 0.4% m/m compared to the expansion of 0.45% in December 2023, while retail sales grew by a timid 0.8% m/m, which implied an improvement compared to the -1.9% m/m of the previous month.

Friday’s results suggest that the retail and industrial sectors continue to perform weaker than expected, reflecting the impact of high interest rates on the economy and lower household demand. Recent statements from BanRep members suggest they want to maintain a contractionary real interest rate and a willingness to accelerate the easing cycle. A decision to cut by 50 or 75bps is considered a foregone conclusion, but in our opinion, both options indicate a cautious approach to the easing cycle and should not have a significant impact on the exchange rate. Minister Ricardo Bonilla favours a cut of 100bps, although the probability of this scenario is low, as is a cut of 25bps. We estimate that the current real rate (ex-ante and ex-post average) is around 5.5% to 6%, which is sufficiently contractionary given the weak economic activity and the trajectory of inflation.

Scotiabank Colpatria’s official forecast is for a cut of 75bps at next week’s meeting (March 22^nd) and a rate of 7.50% at the end of the year. We expect the policy rate to stabilize around 5.50% in the long run.

Key Highlights:

Manufacturing Production:

• Manufacturing production fell 4.3% y/y in January–February 2024 (chart 1), worse than our forecasts but better than Bloomberg analysts’ expectations (-3.5% y/y and -5% y/y, respectively). This completes eleven consecutive months of declines. On a seasonally adjusted basis, the manufacturing sector also contracted slightly by 0.4% m/m, compared to an expansion of 0.45% in December 2023. Of the thirty nine industrial activities covered by the survey, a total of twenty nine recorded negative variations in their real output, subtracting 5.4 p.p. from the overall annual variation, and ten subsectors with positive variations added a total of 1.2 p.p. to the overall variation.

• The largest annual declines were recorded in the manufacture of wearing apparel (-21.8% y/y and -0.8 p.p.), the manufacture of non-metallic mineral products (-11.5% y/y and -0.7 p.p.), the manufacture of basic iron and steel products (-16.3% y/y and -0.5 p.p.) due to lower demand in the construction sector, and the manufacture of textiles (-21.7% y/y and -0.4 p.p.). These activities accounted for -2.4 p.p. of the total annual variation in manufacturing production.

• On the other hand, other important activities recorded annual decreases, in particular those related to durable and semi-durable consumer goods, such as the manufacture of furniture and mattresses (-10.2% y/y and -0.1 p.p.), the manufacture of transport equipment (-11% y/y and -0.04 p.p.) and the manufacture of footwear (-5.6% y/y and -0.03 p.p.).

• In contrast, the best performing activities were pharmaceuticals (22.8% y/y and -0.8 p.p.), other manufacturing (7.9% y/y and -0.1 p.p.), and other transport equipment (-13.1% y/y and 0.1 p.p.).

Retail Sales:

• Retail sales fell 3.9% y/y in January (chart 2), below market expectations (-2.4% y/y) and our estimate (-3.2% y/y). Like the manufacturing sector, this represents a slow start to the year, completing eleven consecutive months of contraction. For the month, eleven of the nineteen commodity groups posted negative year-over-year changes in their real sales, while eight commodity groups posted positive year-over-year changes in their sales. In seasonally adjusted terms, retail sales excluding trucks and public transport rose slightly by 0.8% m/m, an improvement from the -1.9% m/m of the previous month.

• In annual terms, the main negative contributors to the annual rate of change were clothing (-16.7% y/y and -0.8 p.p.), automotive parts and lubricants (-10.7% y/y and -0.8 p.p.), and cars and motorcycles, mainly for household use (-7.7% y/y and -0.6 p.p.), which together contributed -2.2 p.p. to the overall change in retail trade.

• The largest positive contributions came from household appliances and furniture (5.8% y/y and 0.2 p.p.), a slight respite for this sector of durable and semi-durable consumer goods, which is mostly in decline. In addition, personal care products, cosmetics, and perfume (3.0% y/y and 0.1 p.p.) and non-alcoholic beverages (8.3% y/y and 0.1 p.p.) contributed together 0.4 p.p. to the overall change.

Services and hotels:

• In January, fourteen of the eighteen services sub-sectors recorded positive year-on-year changes in total nominal income. The best performing subsectors were advertising (19.7% y/y), real estate, renting and business activities (+1.24% y/y), health services (14.2% y/y with hospitalization and 13.6% y/y without hospitalization), education (10.6% y/y) and restaurants (10% y/y). On the other hand, the sub-sectors with the largest declines were motion picture and television production (-32.2% y/y), call centers (-6.3% y/y), and administrative and office activities (-1.4% y/y).

• In the hotel sector, revenues fell by 10.2% in real terms in January 2024, completing ten months of declines and reaching the lowest level since October 2023. In addition, hotel occupancy reached 49.9% in early 2024, the lowest level since October 2023, although slightly above the pre-pandemic average (49.1%).

—Jackeline Piraján & Santiago Moreno

PERU: GROWTH! FINALLY!

Peru GDP grew 1.4% YoY in January. Who would have thought years ago when growth was robust that we would be celebrating such low growth! The fact is, however, that it was the highest monthly GDP growth rate since November 2022. Another positive was that month-on-month growth was also positive (chart 3).

By far the most encouraging aspect of the data for January is that the two key domestic demand sectors, construction and industrial manufacturing, that underperformed so severely in 2023, finally showed positive growth. Construction GDP was up a strong 13.2% YoY, significantly outperforming the rest of the economy. This was largely expected, however. Much more surprising was the 1.5% YoY growth in industrial manufacturing. We hadn’t expected industrial manufacturing to enter positive territory until the second quarter. A look at the growth chart for industrial manufacturing shows, however, that the improvement in manufacturing GDP has been mercurial in the past few months (chart 4).

Not all domestic demand sectors grew in January. Financial services remained weak, and, together with telecom, is lagging the rebound in demand sector growth (table 1). 

Meanwhile, El Niño continues to be a drag on growth. The heat wave brought on by El Niño in 2023 and early in 2024 continues to impact agriculture and fishing. Fishing should rebound soon, as January closes the fishing season until April, when fishmeal fishing should return to normal and then some. Agriculture may take a bit more time to recover. The heat wave has lasted into early March and, given the lagged effect that it has, could conceivably affect productivity well into the second quarter.

Domestic demand growth should eventually stimulate growth in financial services and telecom. That would leave only agriculture to recover. Once it does, GDP growth should start to surpass 2.0% YoY comfortably.

—Guillermo Arbe