Peru - Economic Briefing August 2004

Strong Mining Sector Buttresses Economic Growth

Despite a dent in the gold and zinc mining operations, the mining sector continues to buttress economic activity.  Moreover, in the second half of this year, the giant Camisea gas project will further fuel economic growth.  As a result, the economy is set for yet another year of robust growth and, barring negative surprises on the political front, should remain on track for strong growth in next year.

Economic growth slows in April as expected
In May, the economy expanded by 4.2% compared to the same month in 2003.  The reading was in line with market expectations and constituted an acceleration compared to the 3.3% growth observed in the previous month.  However, according to seasonally adjusted data the economy contracted 0.71% over the previous month.  This follows on a 0.89% monthly contraction observed in April, which had marked the first contraction since November 2003.  Moreover, the April-May decline represents the first two-month period with consecutive monthly declines since early 2002.  However, despite the slump insufficient time has passed to call the recent developments a trend change.  In fact, the annual average growth rate, inched upwards by 0.2 percentage points from 3.7% in April to 3.9% in May, the first positive movement since October last year.

Mining continues to propel growth amid higher copper and gold output
The economic developments in May were dominated by two factors: a slump in mining and a surge in fishing.  In May, mining and fuels increased by only 0.4% over the same month last year.  Over the past three years, mining had constituted the cornerstone of economic growth and in the first four months of the year, the sector had expanded by 12.0% over the same period last year.  The slump observed in May was mainly due to a 4.7% decline in gold output at the Yanacocha and Barrick Misquichilca mines, which account for more than half of total gold production.  In addition, the contraction of zinc output, which had reached 3.3% in the January to April period, accelerated to 7.6% in May.  Finally, copper, which constitutes the main metal commodity group together with zinc and gold, expanded 19.3% over May 2003.  Copper has benefited from the fast ramp up of mining operations at the BHP Billiton Tintaya mine after activity resumed in October 2003.   The mine now accounts for 11.4% of total copper output and is thus the third largest copper mine after Southern Perú Cooper Corporation (45.8%) and Antamina (35.0%).  While very robust, the May copper output growth remained well below the 26.8% growth rate observed in the first four months of the year and thus contributed to the slowdown.

Buoyant fishing sends primary manufacturing nose-diving
In contrast to the dismal developments of mining, fishing thrived.  In May, the fishing sector expanded by 41.5%, following on 8.7% in April.  Even though the 32.8 percentage point shift in the development of the fishing sector appears very large, the sector frequently experiences these types of erratic output shifts, following sudden climatic changes and government-induced fishing bans.  Last year the government imposed a ban on the catch of anchovies during most of May.  Anchovies are the most important species and account for almost half of total fishing output.  Since anchovy fishing was authorised during the entire month, May counted 31 days of effective fishing, which prompted the strong increase this year.  Primary manufacturing, which depends to a large extent on fishing as a key input, also profited from the recovery in the fishing industry.  In May, manufacturing based on raw materials increased 11.8% over May 2003, which contrasts with a 2.5% contraction the previous month.  The strong recovery came in spite of a 1.6% contraction in agriculture and livestock (April: -5.3% year-on-year), which constituted the only sector in negative territory in May.  Agriculture contracted as a consequence of lower production of potatoes, caused by a lack of rains during the farming and harvest seasons in the highlands; rice due to lower seeding; and a reduction of yields in sugarcane among others.  Conversely, production of coffee, cotton, asparagus and poultry increased.

Non-primary manufacturing slows slightly amid lower intermediate goods output
Growth of non-primary manufacturing, on the other hand, slowed when compared to April.  The 5.0% annual growth observed in May was 3.0 percentage points below the rate registered in April.  The deterioration over April was particularly marked in capital goods, which experienced a strong 27.8% contraction in output, following on an 8.2% decline in April.  Intermediate goods production and Consumer goods output also slowed, albeit on a less dramatic scale.  In May, consumer goods increased 6.9% (April: +8.1% yoy) and intermediate goods added 3.4% over the same month last year (May: +8.3% yoy).  However, in sum, the rebound in primary manufacturing more than compensated for the slowdown in non-primary manufacturing and, as a result, total manufacturing activity grew by 6.5% over May 2003 compared to a 5.6% expansion in April.