Economic activity remains healthy but is showing clear signs of deceleration.  Meanwhile, declining oil prices are narrowing the current account surplus and concerns about the government’s postponement of important economic legislation are prompting increasingly noteworthy capital flight.  As a result, reserves have declined and further deterioration will heighten currency vulnerability if oil price should decline further.

Economic growth solid in first quarter but decelerating.  According to first quarter growth data released by the Central Bank on 26 May, Gross Domestic Product (GDP) grew by 3.5% in the first quarter over the same quarter last year, the fifth consecutive quarterly expansion since the 1999 recession.  The first quarter expansion represents a slowdown from the 6.1% annual growth rate registered in the fourth quarter.  Healthy 4.5% growth in private sector GDP drove the first quarter expansion, while the public sector GDP expanded just 1.9%, despite the government’s higher spending.  Furthermore, the lower oil prices observed this year – the average price of the Venezuela basket reached US$ 22.22 on 8 June compared to the average of US$ 25.91 for last year – prompted a slowdown in the oil sector, which experienced 2.9% growth over the same quarter last year (+9.3% in Q4 2000).  Economic activity in the non-oil sector also registered growth moderation, expanding 3.6% in the first quarter down from 4.5% in the fourth quarter of last year.  Key sectors driving the non-oil economy’s performance in the first quarter were communications and construction, which grew 16.2% and 9.1% respectively over the first quarter in 2000.  The construction industry continues to benefit from strong government spending on infrastructure projects, while communications continues to enjoy double-digit growth as a result of the strong investment in the wake of the liberalisation of the telecommunications sector.  Improved performance in the labour-intensive construction industry will serve to lower unemployment, which dropped to 13.7% in March from 15.0% in March last year.  On the downside, the government and real estate sectors experienced the slowest growth with 0.7% and 1.9% expansions respectively. 

The Central Bank has not yet released global demand and supply data but recent indicators suggest that consumption is experiencing strong growth.  Retail sales were up 37.0% over March last year, driven by a doubling of household equipment purchases and 60.1% growth in transport equipment part sales for the same period.  Textile and clothing sales were the only sectors to register a contraction in March, declining 24.5% over March last year.  May car sales increased by 82% year-over-year, the highest growth rate in the past three years.

This month’s Consensus Forecast for GDP growth in 2001 again was revised downward by 0.2 percentage points from last month with growth expected to be well below the government’s estimate.  Panellists expect growth to accelerate moderately in the second and third quarter of this year but to slow in the last quarter.  The deceleration in growth is expected to persist into next year as the oil price for the Venezuelan mix drops from a projected average of US$ 21.74 per barrel this year to US$ 18.67 per barrel in 2002.  The resulting effect on the oil economy, which accounts for 27.5% of GDP and 48.0% of government income, is likely to lower growth next year.

Inflationary expectations stable.  Consumer prices increased 1.5% in May, which raised the annual inflation rate to 12.6% from 12.1% in April.  The May figure was the highest monthly increase since April last year. The price increase was driven principally by higher food and beverages (+3.8%) and health (+2.7%) costs.  Despite the monthly spike, panellists remain optimistic that consumer price increases will remain contained throughout the year but will not be in line with the Central Bank’s inflation 11% inflation target.

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