Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 39
THE DRUMMER'S EAR | RHYTHMIC REASONING
150
27%
100
23%
50
19%
0
2005
15%
% of GDP
2019 average = 100
Fig. 2: Investment remains depressed, particularly in construction
Fig. 3: Employment recovery and doubledigit remittances growth support consumption
15%
30%
10%
20%
5%
10%
0%
0%
-5%
2022
YoY % change, 3mth moving avg
Gross fixed investment has failed to regain ground from the
pandemic shock—risking Colombia’s long-term potential rate of
expansion—as it’s gone from representing about 22% of total GDP
in 2019 to around 17% at present due to depressed residential
and nonresidential construction (Fig. 2); while machinery and
equipment outlays hold to broad pre-pandemic trends.
months (Fig, 3). Around 800k jobs were created in Jan-Jul 2025
over the same period last year, with the trade, transportation, and
hospitality sector mirroring its solid GDP gains by accounting for
just under half (47%) of the total rise in employment—albeit in a
sector with a high degree of informality. With the manufacturing
sector recovering, it now also represents about 10% of job gains.
Still, we anticipate that rising participation rates, particularly in
urban areas, will result in rising unemployment rates over 2026 to
near 10% as hiring falls short of new entrants.
YoY % change, 3mth moving avg
also come with no direct tax benefits for Colombia’s government
whose deficit of ~7% of GDP allows for very limited public
spending growth as markets monitor public finances with concern.
Manufacturing economic activity only recently emerged from a
two-year period of contracting on a year-on-year basis, while
construction and mining fell by 3% and 7% y/y in 1H25, respectively,
with total output in each of these sectors remaining around
20-25% below pre-pandemic levels.
-10%
2023
Employment (LHS)
2024
2025
International remittances (RHS)
Source: DANE, BanRep, Scotia Wealth Management
2009
2013
Res. & non-res. Construction (LHS)
Total fixed investment (LHS)
2017
2021
2025
Machinery & equipment (LHS)
Total fixed inv. % of GDP (RHS)
Source: DANE, Scotia Wealth Management
Restrictive policy rates (more on this later) are certainly a factor
limiting private investment spending but so is the loss of business
confidence during President Petro’s administration. This is a
challenge that may be resolved under a more business-friendly
presidency following the May 2026 elections, with the caveat that
greater uncertainty may build in the lead-up to the vote. In March
2026, Colombians also elect a new Congress. It is still too early to
bank on a pro-business shift in the executive, however, with no
candidate clearly standing out in polls and as the main alliances
have not yet defined who will lead them in the vote.
Household consumption strength has been backed by strong
income gains due to firm employment growth, but external
sources in the form of remittances and possibly even inflows
related to illegal activities seem to have kicked spending into a
higher gear while augmenting the risks that external conditions
pose to personal spending trends. International remittances have
expanded at an average pace of ~15% y/y in the year to date
and totaled USD 7.6bn as of July (Fig. 3). In the second quarter,
remittances represented just over 3% of Colombian GDP, about a
full percentage above their share of GDP in 2019, pre-pandemic.
In domestic labour markets, Colombia’s unemployment rate of
~9% since March is the lowest in data going back to 2001, resulting
from an acceleration in hiring growth that has gone from practically
no job gains in mid-2024 to now about 3.5% on average in recent
External and domestic sources of income strength, and thus
consumption gains, have come at the right time to counteract
high policy rates to overall leave Colombian GDP growth in good
standing. Aside from the economy’s outperformance giving few
reasons to require lower rates, Banco de la República (BanRep)
remains constrained in its capacity to provide greater policy
support with headline and core inflation remaining elevated at 5.1%
and 4.8%, respectively, as of August.
Indexation practices and minimum wage hikes have resulted in a
pervasiveness in inflation that we think will see BanRep on hold
through end-2025 at 9.25% before restarting rate cuts in 1Q26 to
close out next year at 7.50%. A lot hinges on the decision for next
year’s minimum wage hike to be announced in December 2025,
particularly as the government may be pressed to announce an
increase outside of historical norms ahead of the May 2026 vote.
If that were the case, inflation will continue hovering around 5% in
2026 and BanRep may hold its fire for longer, further delaying an
improvement in domestic investment (and long-run GDP growth
trends).
Alongside inflationary risks, BanRep decisions remain sensitive to
fiscal developments and the risk premium that investors require
from holding Colombian assets. We see limited actions on the part
of the government to cut back on spending that may be needed
to bring the deficit below the 7% zone, and we believe their focus
on revenue-raising measures is much too optimistic, especially in
the months preceding an election. Absent tax or spending reforms,
there is a risk that financial risks motivate an even more cautious
stance by BanRep.
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