Peru - Economic Briefing July 2003

Toledo Reshuffles Cabinet as Popular Support Plummets

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.

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.