Venezuela - Economic Briefing March 2004

Political Volatility Set to Stay for the Time Being (continued)

Oil sector bolstered by higher prices
The oil sector accounted for the lion share of the fourth quarter improvement, as activity in that sector ballooned from a 9.1% contraction in the third quarter to 25.0% growth over the same quarter the prior year.  The fourth quarter figure in the oil sector was the first positive growth rate registered since the first quarter of 2001.  The oil sector benefited principally from higher oil prices, as the average price for the Venezuelan basket at US$ 25.38 per barrel was 13.2% above the same quarter the previous year.

Non-oil economy boosted by strong manufacturing and commerce
The non-oil economy also managed to exit the recession in the final quarter of last year, as growth picked up to a healthy 3.9% pace over the same quarter the prior year, following the 6.1% contraction in the third quarter.  Manufacturing and commerce, which grew by 15.7% and 12.2% respectively, were the main sub-sectors driving the strong rebound in the non-oil economy.  Construction, public services and mining were the only sectors to experience contractions in the final quarter.  Construction remained in deep recession, with activity declining 14.6% year-on-year.  As a result of the continued implosion of the labour-intensive construction sector – activity has dropped at double digit rates since the second quarter of 2002 – average unemployment remained high last year at 18.0% (2002: 16.0%).

Data for aggregate demand and supply data have not yet been published.  However, preliminary Central Bank data indicate that domestic demand rose 7.9% in the final quarter of the year.  The increase was associated principally with an 8.0% pick up in private consumption and a 17.0% boost to the external demand.

Recovery this year but likely below potential
The strong rebound in the final quarter of last year helped ease the economic contraction for the year, which reached 9.2%.  This was below market expectations and also well below the Central Bank’s official projection of a 10.0% to 12.0% contraction.  Nevertheless, the economic contraction exceeded the 8.9% drop in activity in 2002 and thus represented the strongest recession observed in recent history.  A series of economically detrimental factors represented strong impediments to growth last year, including foreign currency scarcity due to exchange controls, price controls, high unemployment, tight credit and high interest rates.  If the current oil price is sustained, the economy is likely to experience another pronounced boost to activity in the first quarter of this year.  In fact, participants see GDP expanding 23.1% over the same quarter last year.  However, as in the fourth quarter, the strong growth rate reflects a very weak comparison base last year, when the economy suffered the economic standstill provoked by the two-month nationwide strike in December 2002/January 2003.  Economic growth is seen to moderate rapidly throughout the year with annual growth reaching 7.0%.  Next year, growth will moderate further, as GDP expands just 4.0%, down 0.1 percentage points from last month’s Consensus Forecast.