Components of Colombia's GDP, percent YOY

Colombia’s GDP shrank by 0.3% YOY in Q3 2023. Excluding the pandemic, the last time the country experienced a quarterly economic contraction was 24 years ago. The market was caught off guard by this lower-than-expected GDP figure. The central bank’s survey projected a growth of around 0.5%, based on the latest opinions of analysts. While our own forecast was 0.6%, this gap forces us to adjust our growth outlook for 2023 from 1.4% to around 1.0%. The main factor behind this negative performance was the sharp declines in manufacturing (-6.2% YOY), commerce (-3.5% YOY), and particularly in investment, which plunged by 33%. On the other hand, some activities showed growth, such as public administration, defense, education, and health (5.3% YOY); artistic and entertainment activities (4.9% YOY); and agriculture (1.8% YOY).


The economy’s contraction occurs within a context where private demand remains weak, given the high policy interest rates that reflect the central bank’s effort to address double-digit inflation (10.5%). Reduced household spending persists due to a significant decline in demand for durable and semi-durable goods. The expenditure data reveals that household spending grew only marginally at 0.4% YOY in Q3. Meanwhile, public spending would have weighed more if not for the still low—though improving—levels of government budget execution. 

Concerns surrounding investment are particularly acute, as it completed three quarters of consecutive contraction and remains below pre-pandemic levels. The tax reform approved last year during the first legislative cycle of President Gustavo Petro’s government increased the corporate income tax rate to 35%, becoming the highest in Latin America. Additionally, regulatory changes and policy uncertainty caused by the government’s disruptive actions have led many investors to postpone private investment until there is greater clarity about the future of Petro’s reform agenda. Some of the sectors that have suffered the most from the government’s business-unfriendly measures are infrastructure and public works, following the government’s decision to freeze toll prices; housing, which—in addition to being affected by high interest rates—has seen changes in social interest policies and subsidies; and the energy sector, where the president’s attempts to impose the electricity price formula by decree and a series of contradictory announcements about oil exploration have all raised concerns.

Our View

Slowing economic activity will impact employment, which had previously been performing well, further sinking the president’s already-weak popularity. In addition, we anticipate that the government will continue to bolster uncertainty. We foresee confrontations with the central bank becoming more frequent as the president blames the institution for the decline in economic activity. The government is also likely to express frustration with the fiscal rule for limiting government spending and with the constitutional court that has blocked several controversial decrees. 

Businesses should expect low GDP growth to persist under the Petro administration, largely driven by continued investment weakness. Furthermore, the central bank could begin to reduce interest rates in December due to these results. While aimed at stimulating aggregate demand and household consumption, cutting rates may not be sufficient if the labor market deteriorates, however. The growing list of government scandals and poor economic results will make it very difficult for the Petro administration to advance its agenda in Congress, further hindering the reform outlook, so our primary concern remains the risk of unilateral disruptive measures by the government. However, Colombia’s institutional strength and system of checks and balances will continue to limit the likelihood of severe policy disruptions.

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