Peru - Economic Briefing June 2003

Social Unrest Despite Buoyant Economy

The current pace of economic growth is unlikely to be sustainable given the higher comparison base for growth last year, which renders achieving such rates ever more difficult. Moreover, the government will have to rein in fiscal spending if it wants to meet the deficit target at a time when Peruvians are taking to the streets to demand that the government keeps its pledges made to the poorer spheres of the population to improve their dire economic situation.

Economy continues to grow at high speed in March …
Recently, a host of economic data was released, which show a resilient but decelerating economy. In March, the economy expanded by 5.2% compared to the same month last year, keeping up with the strong pace observed in February. The healthy March performance was driven mainly by the non-primary sector, which accelerated from a 4.8% expansion in February to 6.0% growth in March, mainly due to higher growth of non-primary industry output. Primary economic activity, on the other hand, dropped 1.9%, following on 3.9% growth in February, amid declines in agriculture and fishing.

… delivering a resilient first quarter
In the first quarter, gross domestic product (GDP) increased by 5.1% over the same quarter last year. Growth was broad-based and level across all components of GDP. However, economic dynamism shifted somewhat from the domestic side of the economy to the external sector. Domestic demand expanded 4.9%, following on 6.9% growth in the fourth quarter 2002, whereas export growth accelerated from 2.9% in the fourth to 7.7% in the first quarter. The main factor behind the domestic demand slowdown was private consumption, which saw growth decelerating from 4.9% in fourth quarter of last year to 4.5%. Despite the slowdown, private sector consumption remains robust, which is also reflected in higher consumer goods imports (+11.0% year-on-year), in particular of electrical appliances and new vehicles. Public consumption mushroomed from a 0.5% contraction in the fourth quarter to a 5.8% expansion in the first. The most notable development, however, occurred in investment activities. Gross fixed investment added 7.4% over the period last year, due to both higher private sector investment (+6.8% yoy versus 4.3% growth in the previous quarter) and a massive 22.0 percentage point turnaround in public sector investment (+11.2% yoy after a 10.8% contraction in the fourth quarter).

Non-primary manufacturing leads growth and fishing draws primary manufacturing into slump
On a sectoral basis, non-primary manufacturing constituted the fastest growing sector, expanding a healthy 7.3% over the first quarter 2002. The buoyant reading follows on a similar performance in the fourth quarter of last year, as the sector continued to profit from the good performance of the textile industry (due to a higher external demand) and to a lesser extent from higher output in the paper and paperboard as well as iron and steel industries. Commercial activities represented the second fastest growing sector, adding 5.8% over the first quarter of 2002, as wholesale and retail sales volumes increased at a quicker pace than in the fourth quarter (+4.4% yoy). Electricity and water output, on the other hand, continued to grow at the fourth quarter pace, gaining only marginally from 5.0% in the fourth quarter to 5.2%. Most other sectors registered sub-par growth, particularly the fishing sector, which saw activity decline 19.2% after a 26.1% expansion in the fourth quarter. The fishing sector typically registers hefty swings dictated by government imposed fishing bans and unreliable weather conditions. Lower fishing activity fed through to a slump in manufacturing based on raw materials (-6.1% yoy; Q4: +8.1% yoy), which depends to a large part on fishing as a primary input material. Mining and oil recorded a notable pickup from lacklustre 1.6% growth in the fourth quarter to a 4.3% expansion in the first quarter. The higher growth rate reflects an increase in gold and zinc output, which was partially offset by lower copper production. Oil and derivatives output decreased 6.2% due to lower crude oil output. Finally, construction activity rose 3.5%, which was down from 4.0% in the fourth quarter. Towards the end of the first quarter, in the month of March, however, activity mushroomed by 11.5%, owing to higher building of roads (+43.2% yoy), in particular, the Inter-ocean corridor in Southern Peru and the Rioja-Tarapoto highway. Despite the resilient performance in the first quarter, Consensus Forecast panellists have lowered their economic projections for the full year a notch over last month since it is increasingly evident that the current pace is unsustainable, as last year’s comparison base rises and the potential for additional fiscal stimulus is limited if the government wants to stick to its deficit targets.

Fiscal deficit improves slightly in first quarter
In the first quarter, the non-financial public sector incurred a deficit equivalent to 1.0% of GDP. The deficit is 0.1 percentage point below the figure recorded in the same period last year. The improvement in central government current revenues, which increased 19.1% in nominal terms, was key to the improvement. The increase reflects the tax measures implemented in the second half of 2002, which raised value-added tax (VAT) collection from 6.2% of GDP in the first quarter last year to 6.9% of GDP and boosted income tax clearance from 2.9% to 3.9% of GDP. Non-financial central government expenditures also rose from 13.1% of GDP to 13.4% of GDP, reflecting a particularly strong increase in capital expenditure. Since the majority of the fiscal deficit is typically incurred in the final quarter of the year, Consensus Forecast panelists have maintained their forecast for the full-year unchanged over last month at 2.0% of GDP, despite the slight improvement observed in the first quarter.