GDP slumps.  In April, GDP expanded 2.8% compared to the same month the year before.  The April reading was well below market expectations, which hovered between 4.5% and 5.0%.  In addition, the April number represents a steep decline from the previous month when GDP expanded a whopping 11.4%.  Even more noteworthy than the low April result is the high volatility currently experienced by the Peruvian economy, which is the main reason why the market forecasts for economic activity have missed the mark by a wide margin in the recent past.

The economic slowdown experienced in April was partly due to a slack fishing sector, where activity declined by 15.1% compared to April 1999 after last month’s “explosion” of 255.6%.  The fishing sector is one of the main drivers behind the volatility in economic activity, as fishing bans are imposed on an ad hoc basis by the Ministry of Fishing when it deems the Peruvian fishing grounds to be overfished.  Since the National Statistical Institute (INEI) registers fishmeal production within the manufacturing industry, manufacturing is also affected by the fishing bans.  For this reason and owing to sluggish non-primary manufacturing performance, manufacturing activity as a whole grew only 5.4% in April over the same month in 1999, compared to the 26.7% growth reported for March.  In addition, growth in commerce slowed from 12.4% in March to 4.9% in April.  Construction once again declined, by 7.4%, after a mere five-month expansion after the 12.3% contraction experienced in 1999.

The government still expects 2000 GDP to expand above the minimum 4% mark set in the Letter of Intent to the International Monetary Fund (IMF) in March 2000.  The Consensus Forecast sustains the government expectations, anticipating GDP growth of 4.5% in 2000, unchanged from last month.

Inflation continues downward trend.  Consumer prices remained virtually unchanged in May, inching up a mere 0.02%.  Consequently, the annual rate dropped from 3.8% in April to 3.3% in May, the lowest rate since August 1999, when slumping domestic demand reduced price pressures.  Panellists see inflation at a year-end rate of 4.5%, slightly lower than last month’s forecast of 4.6%.

Exchange rate affected by political jitters.  The Nuevo Sol continued to weaken amid lingering political uncertainty.  On the eve of the 28 May election, the exchange rate reached the weakest level since early January with 3.53 Soles per US$.  However, after the United States assumed a more conciliatory stance with regards to possible sanctions for what many considered fraudulent elections, the Nuevo Sol strengthened somewhat against the US$ and firmed to 3.49 Soles per US$ on 9 June.  Panellists expect the currency to steadily slide towards the end of the year and forecast a year-end exchange rate of 3.67Soles per US$.

No surprises in external balances.  The current account deficit reached US$ 485 million in the first quarter, the equivalent to 3.5% of GDP.  The deficit figure was slightly better than the forecast of US$ 515 million.  The deficit was more than covered by long-term capital inflows of the private sector (US$ 436 million) and the public sector (US$ 290 million).  The political uncertainties did not affect the net balance of short-term capital inflows, which increased from US$ –209 million to US$ –85 million.  As a consequence of the capital inflow, net international reserves increased by US$ 400 million.  Panellists expect the current account deficit to expand to US$ 2.4 billion in 2000 after US$ 2.0 billion in 1999.

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