Peru - Economic Briefing February 2004

Economy Remains on Track with Politics as Only Shadow (continued)

Outlook remains healthy as Camisea project provides for extra growth
The outlook for the Peruvian economy in 2004 is good despite an apparent lack of drivers and lingering political uncertainty.  On the positive side, growth will profit from the ramp up of the giant Camisea project, which should begin to contribute positively to economic activity in the second half of the year.  This is also reflected in the estimate of Consensus Forecast panellists, who expect economic growth to accelerate to 4.6% in the second half of 2004.  Full-year growth is seen at 4.0%, up from 3.9% expected last month.  Barring negative surprises on the political front, particularly in light of the approaching 2006 national elections, the economy should remain on the robust growth trajectory in the coming year.  Currently, Consensus Forecast panellists expect GDP to expand 3.8% in 2005, up a notch from last month’s forecast.

Consumer prices spike in first month of the year, prompting a notable increase in inflation
In January, consumer prices rose 0.54%, virtually unchanged from the 0.56% increase observed in December.  The January price increase exceeded market expectations, which had expected price stability.  Such a reading would have been more in line with the development observed throughout 2003, when prices increased at a much more moderate rhythm.  In fact, prices had declined for several months in the first half of 2003 and as recently as October, annual headline inflation had reached an annual low of 1.3%.  However, due to price spikes towards the end of the year, annual inflation quickly accelerated, reaching 2.5% at the end of last year.  The additional price spike in January served to push the headline inflation level further upwards to 2.8%.  However, temporary factors are currently driving up prices.  Core inflation, which excludes the volatile impacts of erratic price movements in fresh fruits and vegetables as well as oil, is exhibiting a much more moderate pattern.  In December, the latest month for which data are available, the core inflation index increased at an annual 0.8%.  As a result, headline inflation could drop somewhat in the coming months despite robust domestic demand.  Consensus Forecast panellists have reflected the recent price spikes by raising their year-end headline inflation forecast a notch over last month to 2.2%.