Economic growth set to accelerate in 2025
Economic growth is expected to recover only slightly in 2024, constrained by still high inflation (6.1% in August 2024) and tight monetary policy (10.75% in the same month). This, together with a relatively loose labour market, will continue to weigh on household consumption (74% of GDP between 2021 and 2023). Gross fixed investment (19% of GDP) is also expected to remain weak in 2024, given still-tight financing conditions, President Petro's interventionist agenda and poor prospects for economic growth.
Looking ahead to 2025, the outlook for the Colombian economy appears more favourable. Economic activity is expected to pick up, driven by a recovery in private consumption. First, private consumption will be more supported by real wage growth, both through wage increases and cooler inflation. Second, business investment should accelerate on back of a gradual improvement in financing conditions. The central bank started the easing cycle in December 2023 and is expected to maintain the 50 basis-point rate cut cycle until end-2024, slowing to 0.25 basis points in 2025 (6.0% at end-2025). In this context, the industrial and construction sectors will accelerate their recovery and drive growth alongside government efforts. Mining will experience growth due to demand from the construction sector, but this will be limited by slow progress in the oil industry as investments lessen.
The government has made it a priority to wean Colombia off its dependence on fossil fuels. Most service sectors, except for entertainment, will grow faster than in 2024. However, the external contribution to growth will be smaller than in the previous year due to weak commodity export growth notably due to lower oil production, Colombia’s main exported category and a rebound in investment-driven imports.
Widening current account deficit in 2025
The current account deficit is projected to widen somewhat in 2024, mainly driven by the trade deficit, as both imports and exports are expected to fall, albeit at a faster pace for the latter. In April 2024, Colombia secured a new two-year USD 8.1 billion flexible credit line from the IMF that provides an additional cushion against external shocks. Foreign exchange reserves stood at USD 62 billion in August 2024 (covering about 8 months of imports). In 2025, the current account deficit is expected to widen markedly due to a ballooning of the trade deficit in goods and services, and a further decline in the secondary income surplus. The trade deficit will widen as robust real GDP growth is expected to significantly boost import demand. Although goods exports may increase slightly on the back of improved external demand from regional trading partners, softer labour market conditions in the US are expected to curb expatriate remittance inflows and further reduce the secondary income surplus.
On the fiscal side, the budget deficit is expected to widen in 2024 on back of a lacklustre economy that will hurt revenues. In addition, the government faced setbacks during the year such as the failure to obtain approval from the Council of State – Colombia’s highest tax court – to accelerate tax litigation cases and a Constitutional Court ruling on the deductibility of royalties for oil and coal companies. Looking ahead, the budget deficit is expected to improve slightly in 2025, driven by higher revenues as the economy recovers. However, the Senate rejected the government's 2025 budget proposal, with most lawmakers arguing that the country would not be able to generate the necessary funds to grow fiscal expenditure by 3.9% YoY due to lower-than-expected tax revenues. The bill was rejected even after the government proposed a new tax reform which included plans to tackle tax evasion, tax avoidance and increase taxes on higher income households, with the aim of raising an additional USD 2.8 billion to fund it. Despite the setback, the government announced that it would maintain its proposed budget for 2025. If Congress rejects the proposed tax reform, the government plans to cut spending.
President Petro faces pressure to water down reforms
President Gustavo Petro has faced a difficult political environment in 2024, with legislative gridlock continuing to hamper his reform agenda. Petro's Pacto Histórico coalition holds 19 seats in the Senate (out of 108) and 25 seats in the Lower House (out of 172), requiring negotiating skills to push through reforms. However, the results of the October 2023 municipal elections, in which opposition candidates won by a virtual landslide, have discouraged the opposition from supporting government projects and are putting additional pressure on Petro to water down structural reforms in Congress. In addition, government unpopularity – the Petro administration had an approval rating of only 29% in August 2024 despite its increasingly populist stance, including a plan to introduce a constituent assembly – is another reason discouraging possible alliances with the Pacto Histórico party. In this context, it seems unlikely that Petro will be able to pass his reform agenda before the end of his term of office in August 2026. Following Congress’ rejection of the health reform in April 2024 and the approval of a watered-down version of the pension reform in June later in the year, it seems unlikely that the government will be able to pass other reforms, such as labour and education reforms.
On the foreign policy front, the government has been highly critical of Israel since the start of the war in Gaza and decided to sever diplomatic ties because of Israel's failure to comply with the United Nations Security Council resolution calling for a ceasefire. As for relations with neighbouring Venezuela, there may be some instability ahead given the controversial election results in July 2024, when President Nicolás Maduro was re-elected amid accusations of massive voter fraud by the opposition and much of the international community. Gustavo Petro, who is seen as one of Maduro's international allies, stated in August that the political solution in Venezuela depended on Nicolás Maduro and furthermore proposed the holding of "new free elections". Petro has a particular interest in the outcome of the Venezuelan elections as migration to Colombia is expected to increase in the face of Maduro's new term. Moreover, Petro's dependence on Maduro's mediation in the peace talks with the ELN is preventing him from further criticising the Venezuelan president. Regarding the latter issue, Colombia announced in September 2024 the suspension of peace talks with National Liberation Army (ELN) guerrillas after an attack on a military base in the east of the country left two soldiers dead and 29 wounded. Guerrilla attacks on military targets have intensified since early August 2024, when the ceasefire in place since 2023 was suspended amid turbulence in the peace talks, which have been ongoing since late 2022.