The economy remains firmly entrenched in recession as investment activities, which had come to a virtual standstill amid political uncertainty, have yet to be resumed, whereas consumption is showing first signs of a recovery.  Meanwhile, the subdued domestic demand has prompted a deflationary bout, which has lowered inflation to historic lows. 

Investment plummets but consumption remains in positive territory.  As reported in last month’s edition, the economy contracted another 2.3% in June compared to the same month last year, resulting in a second quarter contraction of 1.0% year-over-year.  According to more detailed data provided by the Central Bank, the decline was once again led by investment, whereas consumption remained in positive territory.  Gross fixed investment contracted a staggering 12.0%, representing the fourth consecutive quarter of double-digit contractions and even worse than the 11.2% slump registered in the first quarter this year.  Consumption, on the other hand, picked up from 0.2% annual growth in the first quarter to 1.1% in the second quarter.  Despite subdued global demand, exports increased 4.2% over the same period last year, whereas imports registered a 1.5% decline.  As a result, global demand registered a contraction of 1.0%.

Non-primary sectors lead decline but primary sectors recover some ground.  The second quarter decline was led by the non-primary sectors (-1.2% year-over-year, up from -2.3% in the first quarter), whereas primary sectors remained almost flat over the second quarter last year (-0.1%, up from -3.0% in the first quarter).  The relatively positive development in the primary sectors was driven by an uptick in the fishing industry, which increased 2.3% following the 6.6% contraction in the first quarter.  While fishing accounts only for a small portion of GDP directly, it serves as an important raw material for other sectors, thus multiplying its impact on GDP.   As a result, the manufacturing industry based on raw materials expanded 3.1%, following the 5.0% decline in the first quarter.  However, since non-primary industries remained in recession (-1.2% yoy), the manufacturing sector as a whole remained flat over the second quarter 2000 (-0.1%).   The other main primary sector, mining and fuels, expanded 3.4%, as strong metals production compensated for weak fuels output.  Construction recovered somewhat from the above 15% contractions observed in the prior two quarters but still represented the worst performing sector with a 6.0% decline.  Commercial activities declined for the first time since the third quarter 1999 (down 2.3% yoy).  The vast category of “other services”, which accounts for more than half of GDP, declined 0.5%.

Early July data augur for weak performance in the third quarter.  The start of the third quarter provided little hope that a recovery is in the making.  While GDP declined at a slower rate than the 2.3% contraction registered in June, the 0.9% year-over-year drop represents the ninth consecutive month of shrinking economic activity and any improvements were characterised by singular events only.  Fishing led the July decline, down 31.0% over July 2000, as the government imposed a temporary fishing ban of anchovies.  On a positive note, metal mining, which accounts for some 5% of GDP, experienced a strong boost (+20.1% yoy) due to the start of operations at the Antamina mine in Ancash.  However, the impulse from the new mining operations was unable to compensate for plummeting fishing input and, as a consequence, primary manufacturing activities declined 7.6%.  Since non-primary manufacturing also experienced a deterioration, overall performance of the manufacturing sector was a dismal 3.3% contraction.  Construction and commercial activities registered some improvement over June but also remained firmly entrenched in recession.  The only positive sector apart from mining was electricity, which added 6.4% in June helped by resuming energy production of the hydroelectric power plant in Machu Picchu. 

Forecasts for this year lowered again but optimism about next year begins to spark.  Because of the dismal economic performance evidenced by the most recent data releases, Consensus Forecast panellists have further cut their forecasts.  As a result, the GDP growth forecast for 2001 dropped another 0.1 percentage point.  On the other hand, panellists are beginning to take faith in the announcements of the Toledo administration to kickstart the ailing economy with a fiscal impetus and have raised the economic growth forecast for the coming year a notch.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Peru.  For more details please click here.

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