The economy, which had been proceeding favourably in the first three quarters last year, has come to a virtual standstill as consumers and investors are cautiously waiting new political forces to emerge from the April 2001 elections.  Seventeen candidates have registered as contenders for the presidency, and apart from last year’s second-to-Fujimori, Alejandro Toledo, no candidate has emerged as a likely winner.

Economy stagnates.  Economic growth in Peru has come to a virtual standstill.  The political jitters have caused uncertainty among investors and consumers alike, both of whom seem to be cautiously waiting for the new political forces to emerge from the April 2001 presidential and congressional elections.  The November growth data indicate that the economy remained stagnant.  In fact, economic growth again expanded a meagre 0.1%, following a 0.1% contraction in September 2000 and 0.2% growth in October.  However, since most market participants had expected a contraction around 0.5%, the November data surprised on the upside.  Growth was driven by primary sectors, which increased 5.3% over the same month the year before, while non-primary sectors contracted 1.0%.  A breakdown indicates that the primary sectors were boosted by a 15% year-over-year expansion in fishing as November 1999 only recorded 15 effective days of fishing.  Agriculture also expanded at a favourable 7.2% clip in November.  Mining, on the other hand, dropped 1.2% over November 1999 in the wake of lower extraction of gold (-5.7%) and hydrocarbons (-6.6%), which was partially offset by higher copper (+5.0%) and silver (+7.0%) output.  The manufacturing industry managed to remain in positive territory (+0.9% year-over-year) due the favourable developments in the primary sectors.  Manufacturing based on raw materials grew by an annual rate of 9.8%, which was partially offset by a 1.7% contraction in non-primary manufacturing.  Meanwhile, the construction industry remains the sector most affected by the economic slump.  After the heavy 10.8% recession in 1999, the cautious recovery in the first quarter 2000 gave way to single digit contraction during the second quarter, which accelerated to double-digits as of September.  In November, the drop in construction activity reached a staggering 17.3%, as investment in roads and other public works continued to be scaled back.  Electricity and water has been virtually unaffected by the economic slump, experiencing a 4.3% expansion in November over the same month in 1999.  Commercial activities even gained some ground over the low expansion rates registered in September and October, adding 2.8% over November 1999.

Further downward revisions in growth prospects.  Concerned about the stagnant state of the economy observed from September through November, some panellists have undertaken further downward revisions to their growth projections for the last quarter of 2000.  The dismal performance and the elections ahead have also negatively affected the outlook for 2001.  The Consensus now sees GDP expanding very modestly.  However, participants remain more optimistic about 2002, as growth forecasts have been revised upward a notch.

Inflation continues to fall.  The nose-dive in economic growth of the past months has helped enable the Central Bank to contain inflation.  In December, consumer prices inched upward by 0.15% over November.  As a consequence, the annual inflation rate dropped from 4.0% in November to 3.7% in December.  Thus, the year-end inflation rate remained within the inflation target range of 3.5% to 4.0% set by the monetary authorities at the beginning of last year.  Price hikes in the housing, fuels and electricity as well as the transport and communications category drove the December price increase.  Both categories were affected by strong increases in fuel prices, despite the downward trend in international oil prices in the latter half of December.  Even though participants have further reduced their economic growth outlook for this year, the inflation forecast has been hiked to well above the Central Bank’s target rate of 2.5 to 3.5%. 

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