Peru - Economic Briefing October 2003

Economy Adjusts to More Moderate Output Growth

The Peruvian economy is adjusting to a new, more moderate growth trend. Growth has begun to trail off from previous exuberant growth rates, as non-recurring factors, which had boosted the economy, subside. Nevertheless, the country may profit from increased demand for commodities in the wake of a stronger global economy.

Growth trails off in July
In July, the economy expanded by 3.3% compared to the same month last year. The reading was half a percentage point below last month’s Consensus Forecast of 3.8% growth and also significantly below the 5.7% growth observed in June. The July figure confirms the establishment of a new growth trend below the 5.2% growth registered in 2002, when the economy had been propelled by new mining operations in the first half and favourable climatic conditions in the second half of the year. With the absence of these one-time boosts to the economy and with the higher comparison basis, a repetition of the dynamism of last year is increasingly unlikely. In addition to the higher comparison base – GDP expanded by 5.0% in July 2002– the economy is suffering from unfavourable climatic conditions, which sent the fishing industry into a nosedive.

Fishing in severe slump amid unfavourable climatic conditions
In July, the fishing sector contracted 26.2% over the same month last year and, thus, constituted the worst-performing sector. Next to a short-term fishing ban at the beginning of the month, the sector suffered from adverse climatic conditions, which led to a further decline in the anchovy catch. Anchovies are the most important fish species, accounting for almost half of all the fishing output. Moreover, July represented the third consecutive month with double-digit contractions, as fishing activity had dropped 26.7% yoy in May and 33.6% yoy in June. As a result, primary manufacturing, which depends to a large extent on fishing as its key input, suffered. In July, manufacturing based on raw materials declined 9.3% over July 2002, following a 9.8% contraction the previous month.

Growth in non-primary manufacturing is slowing
Non-primary manufacturing, on the other hand, continued to increase but at a more moderate pace. The 3.8% annual growth observed in July was only half the rate registered in June. Non-primary manufacturing profited from higher consumer goods production (+5.2% yoy), whereas capital goods output contracted 17.1% over the month last year. Nevertheless, the expansion in non-primary manufacturing was sufficient to compensate for the drop in primary manufacturing and total manufacturing, thus, increased at a 1.0% pace.

Mining mushrooms amid stronger gold output
Mining experienced the most positive development of all sectors. In July, the sector added 11.9% over the same month last year. The strong reading was mainly due to buoyant metals mining, in particular gold. Gold output, which accounts for more than one quarter of total metal mining output, increased 32.3% in July over the same month last year, amid higher output from Yanacocha and Barrick Misquichilca, the two largest gold mine operations in Peru. Iron also experienced strong growth (+33.3% yoy) but is less important for the mining sector.

Outlook sliced as past growth seems unsustainable amid faltering global economy
With the global economy not yet providing a strong impetus for growth, the Peruvian economy will not continue to grow at the exuberant rates seen in the past year. Following a July GDP reading below-expectations, Consensus Forecast panellists have cut their third quarter growth forecast to just 3.2%, down from 4.2% expected last month. In the final quarter, growth will slow further to 2.9%, according to the Consensus. For the full year, Consensus Forecast panellists have left their outlook unchanged at 3.9%, which is also believed to be the rate of economic expansion in 2004.