While Toledo continues to lead the polls, the outcome of the 3 June presidential run-off elections is anything but certain, as many voters remain undecided in the light of recent political scandals.  Meanwhile the economy is headed for a steep nosedive since investors are shunning new investments until the new government takes office on 28 July and clears up some of the uncertainty about the future economic policy framework

Economy continues its tailspin.  The Peruvian economy is headed for a nosedive.  In March, economic activity contracted 3.6% in real terms over the same month last year.  This represents the fourth consecutive monthly decline and the trend continues to point downward.  In January, the economy had contracted 1.6% and deteriorated further to 2.5% in February.  As a result, economic activity dropped 2.6% in the first quarter compared to the same period last year.  Fishing experienced the sharpest drop, contracting 30.3% - after 6.1% growth in February - as the government implemented a fishing ban on anchovies.  Agriculture fell 3.0% amid adverse climatic conditions.  Mining added 0.7% after two months of contraction owing to strong copper, silver and zinc output.  Manufacturing, the most important sector, plummeted 6.3% driven by weak primary industries (-16.1% yoy) and also, to a lesser extent, by non-primary industrial production (-3.1% yoy).  Since fishmeal production is included in the manufacturing industry data, part of the sector’s poor performance can be attributed to the fishing ban.  Surprisingly, electricity and water withstood the general downward trend and added 4.1% over March last year.  Construction, on the other hand, remains mired in deep recession (-16.2% yoy), while commerce slipped into negative territory (-3.5% yoy) following a slight annual increase in February.  

Gloomy outlook for this year and uncertainty about 2002.  The outlook for the Peruvian economy continues to deteriorate.  Political uncertainty has increased after the 8 April presidential elections resulted in run-off elections slated for 3 June between front-runner Alejandro Toledo and investors’ nightmare Alan García (details see below).  Even though the interim government claims to have stepped up public spending, the effects on economic growth cannot be observed yet.  According to Economy Minister Javier Silva Ruete, the benefits of the government’s spending initiative are being offset by weak global economic conditions and the negative effect of electoral uncertainty on domestic business activity.  As a consequence, he has reduced the government’s projection for economic growth this year to 1% to 2%, which is down from the 2% to 3% growth previously expected.  Panellists share the more pessimistic outlook and have again slashed their forecasts.  Nevertheless, the worst seems to be over as the Consensus sees the economy stabilising in the second quarter and expects low but improving growth towards the end of the year.  In 2002, the economy is seen to recover, although the uncertainty for next year remains high, with forecasts ranging from 0.8% to 5.5% growth.

Deflationary bout in April.  In April, consumer prices dropped 0.42% over March.  The deflationary bout caught the market by surprise as the Consensus had expected an 0.4% increase.  Prices dropped as an abundant supply of agricultural products prompted price declines of nearly 1% for some food items, which are heavily weighted in the consumer price index.  Prices for fuels and domestic gas also contributed to the observed price erosion.  Annual inflation fell one percentage point from 3.6% in March to 2.6% in April.  The core inflation index, which excludes the more volatile items in the consumer price index, increased 0.47% in April.  The annual core inflation rate remained unchanged from March at 2.9%.

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