The blow dealt to the global economy meets Peru at a time, when the economy is deeply mired in recession and at the verge of deflation.  However, the impact of global weakening should remain limited, with the major threat concentrated on weakening mineral commodity prices.  Nevertheless, the hoped for recovery brought about by receding political uncertainty, as the new government has taken hold, may be forestalled, since investment projects are likely to be postponed once again.

Economy enters deflationary bout.  The downside effects resulting from the 11 September events, albeit limited, are hitting the economy in recession.  While growth registered the first positive uptick in ten months this August, the 0.7% year-over-year expansion was entirely due to the recently inaugurated Antamina mine, which drove mining activity up 23.8%.  Without the strong expansion in mining, GDP would have contracted yet again, since all other major sectors are still in recession.  Fishing declined 6.2% over the same month last year, manufacturing 3.3% and construction 9.1%.  Panellists have maintained their growth outlook for this year at a modest 0.3%.  For next year, the government expects a strong rebound from this year’s performance.  The 2002 budget assumes 5.5% economic growth and more recent estimates from Finance Minister Pedro Pablo Kuczynski, which take the impact of the terrorist attacks into account maintain an optimistic growth outlook of 4.0%.  The Consensus Forecast panellists do not share the government’s optimism and expect GDP to rebound more moderately to 3.3%, down 0.2 percentage points from last month’s forecast.   

Consumer prices virtually unchanged in September prompting a steep drop in annual inflation.  In September, consumer prices rose by only 0.06%.  Most price categories susceptible to fluctuations in consumer demand, such as furniture and household equipment or clothing, registered declines or remained unchanged, indicating that consumption is still far from recovering.  As a result of the persistent downward pressures on prices, headline inflation dropped from an already low 1.4% in August to 0.9%.  Panellists continue to adjust their inflation forecasts to the almost deflationary environment and have slashed their year-end inflation forecast another 0.4 percentage points to 2.3%, with the minimum forecast at 1.2%.  Next year, the anticipated pickup in domestic demand should exert more pressure on prices and inflation will rise again to 2.8%, as evidenced by this month’s Consensus Forecast.

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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