Peru - Economic Briefing January 2003

Another Year with a Buoyant Economy Ahead

In contrast to its regional peers, who suffer from a faltering global economy, the outlook for Peru looks increasingly positive. After having ended 2002 as the region’s fastest growing economy, 2003 looks like another year with solid growth. With inflation successfully under control – the country hovered around the brink of deflation in the first half of the year – the climate phenomenon El Niño seems to represent the only cloud the horizon.

Economic growth slightly below expectations in October
In October, the economy expanded by 4.5% compared to the same month the in 2001, according to Central Bank estimates. The actual reading remained below a previous government and private sector estimates, which had seen GDP growth close to 5%. The October reading also represented a slowdown compared to September, when GDP had expanded at annual rate of 7.3%. The slowdown over September was evident in all subsectors surveyed by INEI with the exception of mining. Mining grew by 4.5% and thus improved over the meagre 2.8% expansion recorded for September. However, the October reading falls well short of the double-digit growth rates seen in the sector in the first half of 2002, when mining profited from the new operations at the Antamina copper-zinc mine.

Fishing activity plummets as El Niño hits
The economic slump was broad-based across all sectors but was most pronounced in fishing, which declined by 27.3% over October 2001, following on five consecutive months of positive growth, which had culminated in an 18.3% expansion in September. The sudden drop in fishing is due to adverse climatic conditions, which resulted in a lower number of days with effective fishing activity compared to October 2001. Climatic conditions may deteriorate further, as Peru is in for another year of the so-called El Niño weather phenomenon. El Niño is a large scale warming of the surface layers in the tropical Pacific Ocean, which causes great changes in the climate, affecting wide parts of the Americas, among them increased rainfall in Peru. According to information from the U.S. National Oceanic and Atmospheric Administration (NOAA) on 9 January 2003, the El Niño phenomenon has reached its “mature stage” and will linger through the end of spring with wetter-than-average conditions over coastal sections of northern Peru during February-April 2003. However, the impact is of this year’s climate change are expected to be much more moderate than the devastating El Niño of 1998.

Growth in construction, manufacturing and sales also tapering off
Construction also experienced a notable decline from the 13.3% expansion recorded in September, as growth came in at “only” 4.2%. The slowdown is due to a higher comparison base, as October 2001 marked the first month of positive growth after a deep and long-lasting contraction in the sector. Particularly disappointing was the performance of the manufacturing sector, which had boosted growth in September. However, despite the marked slowdown from 7.4% growth in September to 3.1% year-on-year growth in October, the sector remained in positive territory even though manufacturing based on prime materials tanked, due to a lack of input from the fishing industry. Wholesale and retail sales growth also slowed in October. According to INEI, the sector expanded at an annual rate of 3.6% following 6.8% growth in September. Under normal circumstances a decline of this magnitude in a sector closely linked to consumption would raise concerns over the robustness of the recovery. However, given the current positive growth momentum in the economy, the slump is more likely to remain a temporary blip rather than an indication of ebbing growth.

Forecasts revised upward as good news sink in
Even though the current pace of economic growth – in the third quarter the GDP expanded at an annual rate of 5.2% - seems unsustainable, Consensus Forecast panellists remained optimistic about the economic performance in the final quarter of 2002 and raised their estimates by 0.2 percentage points to 4.4%. Estimates for the full year anticipate growth to have reached 4.5%, below the current government projection of 4.8% but, nevertheless, the highest expansion among other regional peers. For 2003 the government expects the economy to expand by 4.0%. This optimism is not shared by the panellists, who see economic growth tapering off to 3.4%, amid a lack of further stimulus. Nevertheless, sentiment is improving, as the current forecast is 0.2 percentage points above last month’s forecast.