Peru - Economic Briefing April 2003

Buoyant Economy As Growth “Trickles Down”

The Peruvian economy is in for another year of robust growth, putting it at the helm of the Latin American economies for the second consecutive year. Whereas last year’s expansion was primarily driven by healthy primary economy. the administration believes that this year’s growth will be propelled by a strong expansion of non-primary sectors, improving consumer demand, and private consumption, as growth begins to trickle down to the poorer income spheres.

Economic growth slows down in January amid a severe slump in fishing industry
In January, the economy expanded by 4.6% compared to the same month last year. The increase was largely expected and was in line with the buoyant development of the Peruvian economy observed in prior months, which had put the country at the helm in the Latin America region in terms of economic growth. Nevertheless, the January performance represents a slowdown compared to the 6.3% growth recorded in December and according to seasonally adjusted data, the economy actually contracted a strong 6.6% over the previous month. The main reason behind the slowdown was the fishing sector, which reverted from a 51.8% annual expansion in December to 24.1% contraction in January. This type of swing in the fishing sector’s growth rate is typical, as these erratic shifts are the result of changes in climatic conditions in the Pacific Ocean and the imposition or lifting of government-mandated fishing bans. The January slump in fishing also fed through to manufacturing based on raw materials, which declined 10.1% over January 2002. Non-primary manufacturing also slowed compared to the very strong 10.4% pace in December but remained at a robust 7.7%.

Construction deteriorates but services show some improvement
Activity in the construction industry decelerated sharply, as the sector reverted from a 5.5% growth rate in December to a 4.7% contraction in January. The only sector that showed a notable improvement over December was mining, which added 3.4% over the same month last year following on a 0.8% contraction in December. The mining sector’s improvement is due to higher metals output, notably gold, silver and iron, whereas fuel output dropped over January 2002. Services registered a small improvement only from the December performance. Commerce improved somewhat, as growth accelerated from 6.1% in December last year to 6.8% in January. So-called “other services”, which account for the bulk of services, picked up from 5.4% to 5.7% over the same period.

Rosy outlook thanks to buoyant non-primary sectors
The Economy Ministry is projecting GDP to grow 5.0% in February and 9.3% in March, which would raise the first quarter growth rate to 6.3%, a very optimistic estimate. Consensus Forecast panellists are somewhat more cautious, expecting GDP to grow “only” 5.4% in the first quarter over a year-ago. Thereafter, economic growth is seen to taper off, as last year’s increasing comparison base renders a continuation of the buoyant growth rates above the 5% threshold ever more difficult. Nevertheless, economic growth for the full year is expected to come in at a very robust rate, up another 0.5 percentage points from last month’s forecast. This month’s adjustment continues the trend of upward revisions observed in the past months. The government also hiked its outlook for this year from the previous 4.0% estimate to a range of 4% to 5%. The administration believes that this year’s growth will be driven by a strong expansion of non-primary sectors, improving consumer demand, and private consumption, as growth begins to trickle down to the poorer income spheres.