Government faces stagnant economy.  According to the National Statistical Institute, economic activity remained subdued in October with GDP increasing a meagre 0.2% compared to the same month last year.  The weak October figure follows a 0.1% contraction in September.  Unlike last month, when the downturn caught the market by surprise, this month’s dismal reading was largely expected as the comparison base in 1999 was higher, making the respectable growth rates seen earlier this year harder to achieve.  Political effects are also beginning to show effects, although the brunt of the political uncertainty will be felt next year, as investments are likely to be held back until after the elections.  As in September, fishing and construction were the only sectors that registered a contraction.  The fishing industry continues to suffer from a fishing ban and contracted 27.9%, while the construction sector contracted as a result of cutbacks in government spending, which made the sector suffer a 14.2% squeeze over October 1999.  The manufacturing industry reverted from the 1.5% contraction in September to 0.8% growth but remains well below the rates seen earlier this year (+8.5% in the first ten months over the same period last year).  Commercial activity also remained subdued, expanding only 1.6% compared to 5.9% growth in the first ten months.  The future looks anything but rosy, as the economy will suffer from lower domestic demand following the credit crunch, higher unemployment, and fiscal cutbacks.  Accordingly, panellists have further reduced their GDP growth projections.  The adjustments to next year’s outlook have even been more drastic.  GDP is now seen as growing at half the rate envisioned in September.

Inflation drops.  The slump in economic activity is containing inflation.  In November consumer prices remained virtually unchanged (+0.06% over October) and the annual rate dropped to 4.0% from 4.2% in October.  Strong increases in fuels (+6.1%), water services, fruits and alcoholic beverages were offset by price declines vegetables and fish.  Owing to the positive November reading, panellists have adjusted their year-end inflation outlook to 4.1%, which is now almost in line with the Central Bank’s upper inflation target of 4.0%.  The reduced outlook for domestic demand in the coming year has also impacted the forecast for next year’s inflation rate, which is now seen at 3.8%, down from 3.9% last month but still well above the Central Bank’s target rate of 2.5 to 3.5%.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Peru.  For more details please click here.

For five-year forecasts, please click here.