Peru - Economic Briefing November 2003

Unchanged Outlook as Economy Develops Along as Expected

The Peruvian economy is developing along the expected trajectory, neither providing surprises on the upside nor on the downside. Growth has begun to trail off from previous exuberant rates, as non-recurring factors, such as new mining operations, which had boosted the economy last year, subside. Nevertheless, economic growth is likely to remain robust, as the country profits from increased demand for commodities in the wake of a stronger global economy.

Economy expands below expectations in August
In August, the economy expanded by 3.1% compared to the same month last year. The reading was well below last month’s Consensus Forecast of 3.7% growth and also slightly below the 3.4% growth observed in July (revised upward from 3.3% reported last month). The August figure confirms the consolidation of a new growth trend significantly below the 5.0% threshold, which had characterised the economy for one year up to the end of the first quarter 2003. Past growth had been propelled by new mining operations and favourable climatic conditions. Without these one-time boosts and with the higher comparison basis, economic growth will mostly likely decelerate to the rates currently experienced.

Fishing rebounds in August after three devastating months lifting primary manufacturing
While the August growth reading came in close to the July figure, the economic sectors developed along distinctly different lines in the two months. In August, fishing activity expanded by 5.2%, following three months of contractions at at rates well in excess of 20%. Compared to the 26.2% year-on-year contraction observed in July the August figure constitutes a swing of 31.4 percentage points. The rebound in fishing is due to the lifting of the anchovy fishing ban, which had subdued results in the previous months and in August 2002. As result, the anchovy catch increased sharply over the same month last year, which helped lift the whole sector. Primary manufacturing, which depends to a large extent on fishing as its key input, also profited from the recovery of the fishing industry. In August, manufacturing based on raw materials increased 2.3% over August 2002, following a 9.3% contraction the previous month.

Non-primary manufacturing slumps amid lower capital goods output
Growth of non-primary manufacturing, on the other hand, slowed over July. The 1.2% annual growth observed in August was less than a third the rate registered in July. Lower growth in consumer goods production (August: +0.8% yoy; July: +5.2% yoy) and a steeper contraction in capital goods output (August: -26.2% yoy; July: -17.1% yoy) prompted the slowdown in non-primary manufacturing. Intermediate goods production, on the other hand, accelerated slightly (August: +2.7% yoy; July: +2.5% yoy). Nevertheless, due to the rebound of primary manufacturing, total manufacturing activity grew at a slightly quicker pace in August (+1.4% yoy) compared to July (+1.0% yoy).

Mining slumps as copper output falls in Antamina mine
Mining experienced the sharpest slowdown of all sectors. In August, the sector grew by only 1.2%, a sharp drop compared to the 11.9% year-on-year expansion observed in July. In July, the sector had profited from a robust rise in gold output from Yanacocha and Barrick Misquichilca mines, the two largest gold mine operations in Peru, which lifted gold output by 32.3% compared to July 2002. In August, gold output grew only at half the pace, which was still a respectable 14.2% over August 2002 but in part explained the large drop in mining growth compared to July. The other part of the slowdown can be attributed to copper, which is Peru’s most important mining commodity and accounts for more than one quarter of total metal mining output. In July, copper output increased at an annual rate of 9.3% but in August activity dropped by 14.8% amid a huge production decline at the Antamina mine, the country’s largest copper operation.

Outlook sliced as past growth seems unsustainable amid faltering global economy
Owing to the slowdown observed in July and August this year, Consensus Forecast panellists have sliced their estimate for third quarter growth from 4.1% expected last month to the current 3.2%. Moreover, panellists are convinced that the current pace marks the new trend underlying the Peruvian economy and see economic growth at 2.8% in the final quarter of the year. The forecast for the full year remained unchanged at 3.9% for the fourth consecutive month, as the Peruvian economy develops along the expected lines, neither providing surprises to the upside nor to the downside. The more moderate growth outlook just etched off a notch from the 2004 GDP growth projection. Consensus Forecast panellists now expect the economy to expand 3.8% next year, following on last month’s 3.9% forecast.