Peru - Economic Briefing September 2003

Economic Growth Receding from Past Exuberance

The Peruvian economy is entering new territory, as growth begins to trail off from previous exuberant growth rates. So far, the economy had been boosted by non-recurring factors. However, with these factors falling away and a higher comparison base of last year kicking in, the recent growth trend will taper off to more moderate rates.

Economy surprisingly strong in June
In June, the economy expanded by 5.7% over the same month last year. The reading was well above market expectations and also exceeded the growth rates of 3.1% in April and 1.5% in May of this year. The strong June reading was mainly due to buoyant commercial activities and robust industrial output, which were offset only by a substantial weakening in fishing activities. The upward surprise in June also lifted the second quarter gross domestic product (GDP) result beyond expectations.

Economy performing above expectations but activity slowing compared to previous quarters
In the second quarter, the economy expanded by 3.4% as a result of the strong June surge in activity. The second quarter figure was above Consensus expectations, which had anticipated a 2.3% expansion. Surprisingly, the second quarter figure came in more in line with the July Consensus, which had seen GDP expanding by 3.7% but was revised downwards in the wake of the dismal 1.5% growth reading in May. Nevertheless, even though the second quarter reading came in above the lowered market expectations, the data confirm the expected deceleration in economic activity. Last year, new mining operations in the first half and favourable climatic conditions in the second, which boosted fishing and the related manufacturing industries, helped propel the economy to 5.3% growth. Furthermore, in the first quarter of this year, the economy had still expanded at a robust 5.8% pace. In the second quarter, however, the higher comparison base of last year began to kick in and the growth rates in excess of 5% appear to have finally come to an end.

Exports lead growth as domestic demand suffers from tighter government spending
Despite the slack in the global economy, which is containing export growth in the Latin America region, the domestic side of the economy was the key element behind the deceleration over the first quarter, whereas the external sector actually supported growth. Domestic demand expanded by only 2.4% over the same period last year, less than half the 5.8% recorded in the first quarter. The slowdown in domestic demand was broad-based but was most pronounced in investment activities. Growth of gross fixed investment slowed to 3.4% following on 7.6% in the first quarter, as the Toledo administration scaled back public investment projects. As a result, public investment actually fell 3.1% in the second quarter compared to 11.9% growth in the first quarter. Private investment, on the other hand, slowed only moderately from 6.9% growth in the first quarter to 4.8% in the second. Private investment continues to profit from tasks linked to the giant Camisea gas project and from a robust expansion in manufacturing activities, particularly in the textile and construction sectors. According to the Central Bank, the higher investment was also reflected in other indicators. Capital good imports, for example, excluding construction materials, rose 10.6% over the same quarter last year and construction activity increased 4.7%. The need to limit public sector spending was also evident in consumption. Public consumption grew by 2.1% in the second quarter, less than a third the 6.7% growth registered in the first quarter. Growth in private consumption also slowed, albeit more moderately from a 4.5% pace in the first quarter to 3.0% in the second. Growth in private consumption was sustained by a rise in national disposable income as well as an expansion in consumer loans. This increase was also reflected in higher consumer good imports (+5.7% yoy), in particular, durable goods acquisitions (+6.5% yoy) and the higher manufactured goods output (+2.6%). Exports expanded 7.6% and thus led economic growth in the second quarter and actually even accelerated compared to 7.2% growth in the first quarter. Imports, on the other hand, decelerated rapidly, amid more subdued domestic demand, slowing from 7.3% growth in the first quarter to a meagre 1.4% in the second.

Fishing slumps again in second quarter, mining and construction exhibit buoyant growth
On a sectoral basis, fishing constituted the main driver behind the second quarter slowdown. Unfavourable climatic conditions have prompted the government to impose fishing bans of the all-important anchovy species, which accounts for almost half of all fishing activities. Lack of input from fishing also sent primary manufacturing, which depends to a large extent on fishing for its input, into a tailspin. Consequently, fishing and primary manufacturing were the only two sectors that registered a contraction in the second quarter. At the other end of the spectrum, mining and fuels was the fastest growing sector, driven by higher output of the country’s gold and zinc mines. Construction represented the second fastest growing sector. The good performance of construction continued thanks to higher mortgage market activity and new government housing programs.