The political jitters have driven the Peruvian economy into negative territory and gradual recovery is foreseeable only once the political uncertainty related to the upcoming elections subsides and the emerging new political forces succeed in restoring consumer as well as domestic and international investor confidence.

December economic activity surprises on the downside.  Weak December data releases suggest that Peru may be heading towards a recession.  According to the National Statistical Institute, the economy contracted 1.8% compared to December 1999.  This is the first contraction exceeding 1% since August 1999 and considerably below market expectations, which were at 0.5%.  The weak December figure was the result of a downturn in the fishing sector, which was hurt by a ban imposed to protect fish stocks and consequently declined 22.8% over the same month 1999.  As a result, the manufacturing sector, which depends in large parts on input from the fishing industry, registered a 5.1% year-over-year contraction, down from anaemic growth at close to 1% in October and November.   The most severe decrease, however, was suffered by the construction industry, which contracted 19.2% over the same month 1999, as the government cut public spending on motorways and roads by almost 50%.  Growth in the electricity and water sector remained in positive territory with a 3.2% expansion, a lower level than in November.  Commerce also experienced a decline in growth rates from 2.8% in November to 0.9% in December.  The only sectors that showed improved growth rates over November were agriculture (+7.5% yoy, November: +7.2%) and mining, which registered a 1.1% expansion, following a 1.2% contraction in November.

GDP expanded 3.6% in 2000.  The surprisingly negative December reading has left growth in 2000 at 3.6%, slightly below the 3.8% forecasted by the panellists.  On an annual basis, the primary sectors led growth.  Agriculture expanded by 6.4% and fishing by 8.1%, while mining added 2.4%.  Manufacturing gained 6.5% over 1999, trailed by Commerce (+5.3%) and electricity and water (+4.6%).  The only contraction was experienced by the construction sector, which declined 4.5%, following the 10.8% contraction in 1999. 

Political uncertainty subdues outlook.  The outlook for this year remains subdued.  The economy will continue to stagnate in the short term, as investment and consumption are likely to begin to recover only once the political uncertainty related to the election outcome recedes.  In addition, the fiscal restraint imposed by the interim administration under President Paniagua should prolong the recession in the labour-intensive construction sector.  Nevertheless, after bottoming in Q4 2000, the economy is seen as gradually pulling clear this year. 

Moderate price increases in January.  The recent slump in domestic demand has assisted the Central Bank in containing inflation.  In January, consumer prices increased 0.19% over December 2000, well below the 0.32% average monthly increase in the past 12 months.  Price hikes in the housing, fuels and electricity category as well as in the health sector drove January prices higher, whereas prices in transport and communications declined.  The annual rate increased from 3.7% in December 2000 to 3.9% in January.  For 2001, the Central Bank plans to maintain inflation between 2.5% and 3.5%.  The Consensus expects the Central Bank to overshoot its target, despite the fact that panellists adopted a more pessimistic growth outlook than the Central Bank’ in its Monetary Program for 2001.

Public accounts deteriorated in 2000.  The government estimates that the fiscal deficit incurred in 2000 was equivalent to 3.0% of GDP, a full percentage point above the target agreed to with the International Monetary Fund (IMF).  The higher deficit was prompted by excessive spending prior to the elections in 2000 and to deteriorating tax revenues in the wake of the economic slump observed in the last quarter.  The deteriorating effects were countered by spending cuts executed by the interim administration but could not be fully compensated. 

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