The political uncertainty is likely to sent Peru into a recessionary bout early this year.  Meanwhile, the campaigns for the 8 April presidential and congressional elections are heating up.  Polls indicate a close run in a second-round runoff election between left leaning Alejandro Toledo and centre-right Lourdes Flores.

Strong contraction in investment.  Data for global demand and supply indicate that the 0.3% contraction in fourth quarter GDP last year (see February edition for details) can be attributed mainly to the impact that lingering political uncertainty and the maintenance of fiscal discipline have had on investment.  In fact, internal demand dropped 1.5% in the fourth quarter of 2000 over the same period in 1999, principally as the result of a 13.9% contraction in gross domestic investment (gross fixed investment: -14.4%), whereas consumption expanded at a 2.1% clip.  According to the Central Bank data, the decline was more pronounced in the public than in the private sector: public consumption declined 4.4% compared to an increase of 3.0% in private consumption.  In investment, the difference between the decline in public and private sector activity was even more pronounced.  While private gross fixed investment contracted by 9.5% over the fourth quarter 1999, public sector investment dropped by a staggering 29.9%.  The cutback in public infrastructure investment, which has been implemented to limit the deterioration of fiscal accounts, has had a particularly strong effect on the construction industry, which suffered a 15.4% contraction in the fourth quarter. 

Economy continues to drag in January.  January data indicate that the slump in construction persisted and that activity in other sectors also remains subdued.  Nevertheless, the 1.6% contraction in economic activity over January 2000, reported by the National Statistical Office (INEI), represents a small improvement over the 1.8% decline registered in December.  Construction led the decline, down 14.8% year-over-year, following a 19.2% contraction in December.  The manufacturing sector registered a significant upswing from the 5.1% dip in December to 0.1% growth in January.  However, the recovery in manufacturing was driven by the primary goods industry in the wake of a 5.0% expansion in fishery activities, following a fishing-ban induced contraction in December.  Electricity and water added 4.4% (December: 3.2%).  On the other hand, mining stumbled into negative territory (-4.4% in January after + 1.1% in December) and commerce experienced the first contraction since August 1999, indicating that private consumption is deteriorating.  The January data indicate that the Peruvian economy is headed for a recession.  Panellists expect a first quarter GDP contraction of 0.1% but see a gradual recovery towards the end of the year.  For the year, they expect GDP to expand by 1.8% further improving to 4.1% in 2002. 

Inflation remains contained.  The slump in Peruvian economic activity is facilitating Central Bank inflation control.  In February, consumer prices eased up by 0.25% over January.  As a consequence, the annual rate dropped from 3.9% in January to 3.6% in February.  Food and beverages were almost entirely responsible for the February price hike, accounting for 0.2% of the total price increase.  The transport and communications, on the other hand, experienced minor price declines.  Other categories registered positive price changes but contributed little to inflation.  Panellists expect year-end inflation at 3.9%, down a notch from the 4.0% expected last month. 

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