Peru - Economic Briefing May 2003

Buoyant Economy amid Rising Domestic Demand

The current pace of economic growth is unlikely to be sustainable given the fundamentals of the Peruvian economy. The higher comparison base of last year will kick in as of the second quarter and will lower growth to a more moderate pace. Nevertheless, Peru remains one of the fastest growing economies in the region, as increasing domestic demand compensates for a weaker global economy.

Economy maintains high pace in second month of the year
The economy continues to develop along the favourable trajectory, which puts it at the helm of the Latin American economies. In February, the economy expanded by 5.3% compared to the same month last year, stepping up the speed from the 4.6% expansion registered in the first month of the year. The strong February performance was mainly driven by the primary sector, which accelerated from a lacklustre 0.7% expansion in January to 3.8% growth in February, amid strong mining and fishing. Non-primary economic activity increased 5.7%, virtually unchanged from January.

Mining and fishing boost growth in February
In February, the annual growth in mining and fuels reached 9.3%, which was more than triple the January rate. The robust reading reflects a particularly strong performance of gold, silver and copper mining and a positive contribution from virtually all other minerals. Fuels actually declined over February 2002, albeit at a lower rhythm than in January. Fishing constituted the second fastest growing sector in February. Activity expanded 7.2% over February 2002, following on 24.1% contraction in January. This type of volatility in the fishing sector’s growth rate is not unusual, as changes in climatic conditions in the Pacific Ocean and the imposition or lifting of government-mandated fishing bans do not provide a foundation for a stable growth path. In February, the fishing sector profited from greater catch of jurel and mackerel, amid favourable climatic conditions. Anchovy fishing, which accounts for almost half of total fishing, on the other hand, continued to decline as the government-imposed fishing ban remained in force in large parts of the coast. The February recovery in fishing also fed through to raw material manufacturing, which rebounded from a 10.1% contraction in January to a much more moderate 0.3% decline in the second month of the year. Non-primary manufacturing activity, on the other hand, slowed compared to January but remained at a robust 5.4% annual growth rate. The strength in non-primary manufacturing is mainly due to vigorous production of consumer goods, since intermediate and capital goods are expanding at a more moderate pace.

Construction returns after bout of weakness in January
Construction reverted from a bout of weakness observed in January and resumed the strong expansion observed since October 2001. In February, the sector expanded 4.7%, mirroring a decline of the same magnitude in January. Activity in the sector profited from higher housing and road construction, where the latter was boosted by the execution of the Inter-Ocean Southern Corridor. The agriculture and livestock sector grew 1.4% in February, down from 4.6% year-on-year growth in January, amid lower output of rice and potatoes. Services developed mostly along the lines observed in January. Commercial activities slowed from 6.8% growth in 5.1% in February, whereas other services added from 5.7% to 6.0% growth.

Outlook for this year stabilises at high level
According to this month’s Consensus, the favourable development in the first two months of the year is likely to have persisted throughout March, boosting economic activity by 5.5% in the first quarter this year over the same period last year. Such a reading would represent the fourth consecutive quarter of growth exceeding 5%, a rate that is unlikely to be sustainable given the current fundamentals of the economy. Even though economic growth will benefit from some large scale investment projects, mainly the giant Camisea gas project, the higher comparison base of last year will kick in as of the second quarter this year. In fact, Consensus Forecast panellists see economic growth decelerating in the second quarter before gaining speed in the second half of the year. Growth for the full year is seen at the same rate as last month. While this growth rate keeps Peru in the top spot regarding economic growth compared to its regional peers, it brings the series of significant upward revisions, which have lasted through the past months, to an end.