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Faced with strikes, social unrest and a
precipitous drop in popular support, President Toledo has reshuffled his
cabinet. The nomination of Beatriz Merino as Prime Minister – the first
woman in this position – was generally welcomed. However, Toledo maintained
some important cabinet positions unchanged and will continue to face a
staunch opposition in Congress. Meanwhile, the economy is developing
favourably, even though economic growth is decelerating from the buoyant
rates observed in the past. |
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Economic growth slows
substantially in April due to seasonal factors and faltering manufacturing
In April, the economy expanded by 2.5% compared to the same month last
year. The reading was a full percentage point below last month’s Consensus
Forecast of 3.5% growth and was less than half the 5.2% growth observed in
February and March of this year. Moreover, the April reading represented
the lowest growth rate in more than a year. In part, the slowdown is due
to seasonal factors since April 2003 counted less working days than April
last year due to Easter. However, the slowdown also reflects significant
shifts in the developments of various sectors. In particular, non-primary
manufacturing slumped in April, as activity dropped 3.2% over April last
year. Up to March, non-primary manufacturing had constituted the main
engine behind the economic expansion, with growth rates persistently above
the 5% threshold since July 2002. In March the sector was still growing at
a 8.8% year-on-year pace. The slowdown has affected all sub-sectors but
was most concentrated in capital goods output, which dropped more than a
third over the level observed in April last year. Consumer and
intermediate goods experienced much more moderate slowdowns. Consumer
goods declined 3.7% year-on-year and intermediate goods dropped 1.1%.
Primary manufacturing rebounds in the wake of good fishing season
The dismal performance of non-primary manufacturing was partially
compensated for by a very healthy output expansion in primary
manufacturing, which grew by 9.2%, following on a 7.0% contraction in
March. The improvement is mostly due to a recovery of the fishing
industry, which serves as an important input for primary manufacturing.
Fishing expanded 8.1% over April last year, a 39.5 percentage point swing
compared to the 31.4% decline registered in March. Such volatility is
rather typical for the Peruvian fishing sector, which depends to a large
extent on the whims of climate and government-imposed fishing bans to
protect the all-important anchovy species. Finally, climatic conditions
favoured the agricultural sector, which expanded 4.7% in April, following
on a 0.5% contraction in March.
Mining improves over March but construction and services take a nosedive
Mining activities also registered a notable improvement in April compared
to the previous month. In April, the sector added 8.2% over the same month
last year, whereas in March, mining activities had expanded by a meagre
1.0% only. According to the National Statistical Institute (INEI), the
improvement was broad-spread amid the major metals, with the exception of
copper and tin. Only gold output grew well above average. Construction, on
the other hand, took a steep nosedive, as growth tapered off from a very
strong 11.5% in March to only 2.0% in April since the Easter holidays
slowed activity in the sector. This fate was shared by the service
sectors, which all registered lower growth rates compared to the previous
month.
Outlook maintained unchanged
Even though the slowdown observed in April is partly due to seasonal
factors, it is likely to mark the turning point in the Peruvian economy.
In the past, one time effects, such as large-scale new mining operations,
had boosted economic growth to 5.2% in 2002 and 4.9% in the first quarter
of this year. These rates, however, are unsustainable given the current
set of fundamentals underlying the economy. With the higher comparison
basis of last year kicking in, growth rates in excess of 5% are now
drawing to an end. Consensus Forecast panellists see growth slowing to
3.2% in May. In the second quarter, the economy is seen to expand just
2.6%, picking up to 3.5% in the second half of the year. For the year as a
whole, Consensus Forecast panellists maintained their forecast unchanged
from last month.
Consumer prices drop in June for third consecutive month
In June, consumer prices dropped 0.47%. The decline represents the third
consecutive month of declining consumer prices, even though the deflation
observed in April and May was very moderate. Declining prices for food and
beverages as well as lower housing costs constituted the main drivers
behind the June price decline but were mitigated by price increases in
clothing and furniture. Owing to the June price decline, the annual
headline inflation rate dropped from 2.4% in May to 2.2% in June. Headline
inflation is now slightly below the Central Bank’s year-end target of 2.5%
with 1% margin to either side of the mark. The Consensus is optimistic
that monetary authorities will achieve their target and maintains its
year-end headline inflation forecast unchanged from last month.
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