The strong oil price last year served to boost the economy out of the 1999 recession with both consumption and investment rebounding strongly.  However, the threat of further deterioration in oil price levels this year will require consistent monitoring and if sustained could serve to undermine growth prospects and currency stability.

Growth recovered in 2000.  High oil prices last year served to bolster the economy despite political uncertainty related to constitutional reform and nationwide elections.  While growth in the first two quarters remained subdued, registering 1.2% and 2.7% expansions respectively, the second half saw a more pronounced rebound with economic activity picking up 3.4% and 5.6% in the third and fourth quarter respectively.  According to preliminary Central Bank data reported on 26 December, the strong growth pickup at the end of the year helped bolster the economy substantially with the annual growth rate reaching 3.2%.  

Underlying the improvement in economic performance was a 3.4% growth in the oil economy, driven by oil prices, which reached 20-year highs last year.  According to the Ministry of Energy and Mines, the price of the Venezuela’s mix of crude oils averaged US$ 26.59 per barrel in 2000.  Meanwhile, the non-oil economy expanded at a 2.7% pace impelled by a strong expansion in the communications and mining sectors, which grew by 14.7% and 8.4% respectively.  Even though the construction industry showed signs of recovery in the last two quarters of 2000, with growth at 0.4% and 6.9% in the third and fourth quarter respectively, the expansion was insufficient to offset the 17.4% and 12.6% contractions in the first and second quarter respectively.  Therefore, the construction sector was the worst performer last year, declining 4.9% and, thus, registering the third consecutive annual contraction.  The budding recovery in the labour-intensive construction sector will help lower unemployment levels, which remained high (+13.0%) in the second half of the year, according to the National Statistical Office (OCEI).  The financial services industry finally emerged from a two-year recession with growth subdued but in positive territory at 1.6%.

Annual aggregate demand and supply data indicate that the 4.8% growth in consumption was the primary driver behind the recovery last year, while net investment lagged behind with more modest 2.0% growth.  Within consumption, government consumption grew by 5.6%, while private consumption expanded at 4.6%.

The government’s economic policy agenda and the sustainability of the current growth trajectory remain heavily dependent on high oil prices.  In December, oil prices dropped by US$ 11.53 per barrel, closing the year at US$ 20.03, just above the government’s budgeted oil price for this year.  Even though in early January prices recovered some of the lost ground and Venezuela is advocating production cutbacks in OPEC, further deterioration cannot be excluded and would force the government to implement cutbacks to its spending program, thus undermining growth.  The strong international reserve inflow and the resultant build-up in the resources available via the Macroeconomic Stabilization Fund (US$ 4.6 billion at the end of December) will provide some cushion for any adverse development in the fiscal accounts.  Panellists remain optimistic that the positive growth trajectory will be sustained this year.

Inflation at a decade low.  Consumer prices were up 1.0% in December, which brought the annual inflation rate down to 13.4% from 20.0% in 1999.  The December rate brought annual inflation to its lowest level since 1986 and below the government’s 15.0% inflation target.  The economic pickup this year is expected to drive up inflation, which is seen by participants to exceed the government’s 11.0% inflation target for this year.  Nevertheless, this month’s Consensus Forecast indicates that inflationary expectations continue to improve, with the anticipated consumer price figure again below last month’s figure.  

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