Venezuela - Economic Briefing August 2004

Referendum Nears but Change in Policy Unlikely (continued)

Domestic demand remains strong
According to the Central Bank, the non-oil economy is also proceeding along a strong expansion trajectory.  In May, private manufacturing industry output rose 24.8% over the same month last year.  The May reading was above the already robust 24.0% and brought the trend of decelerating output growth to a temporary halt.  The strong output expansion in leather goods (+210.6% year-on-year), automotive vehicles (+153.2% yoy) and wood products (+138.2% yoy) helped bolster May manufacturing output.  The only sub-sectors in private manufacturing to experience declines were basic metals (-7.0% yoy) and machinery/electrical apparatus (-6.8% yoy) production.  Consensus Forecast participants expect the growth pace to decelerate but anticipate annual growth to reach 12.2%, which is up 1 percentage point from last month’s forecast.

Consumption maintains strong expansion but slows moderately
Private consumption also continues to grow at healthy rates.  In May, retail sales volume, including automotive vehicles, rose 21.0%, which was down moderately from the 23.5% expansion observed the prior month.  Automotive vehicle, supermarket and drug store sales experienced the strongest expansions of 81.8%, 51.0% and 47.8% respectively over May 2003.  On the downside were clothing and shoe (+0.9% yoy) along with household item sales (-22.5% yoy).  The pronounced nature of the recent economic recovery is partly overstated by the very low comparison base last year, when the economy came to a standstill as the result of a two-month nationwide strike against the Chávez administration.  Nonetheless, some economic fundamentals have also improved, namely, the stability of the currency, the moderation of inflation, gradually declining interest rates and lower unemployment.

Outlook improves amid favourable oil developments and sustained growth in domestic economy
Consensus Forecast participants have again undertaken a notable revision to the growth estimate for this year, as oil prices have remained persistently high and domestic demand growth is being sustained at healthy levels.  Gross domestic product (GDP) is now expected to grow 9.1% this year, which is up 0.8 percentage points from last month’s forecast and puts Venezuela at the helm of the Latin American region this year.  Next year’s outlook, however, remains unchanged at 3.5%, as oil prices are expected to drop and interest rates to rise amid a high inflationary setting.

Inflation moderates despite pick up in economic activity
In July, consumer prices rose 1.38%, which was in line with market expectations and came in below the 1.85% reading the prior month.  Strong price increases in household equipment and household services accounted for the lion share of the July increase in consumer prices.  As a result of the July reading, annual inflation dropped from 22.3% in June to 21.8%.  Despite the favourable July figure, Consensus Forecast panellists anticipate annual inflation to rise this year, as the anticipated exchange rate devaluation would raise the pressure on domestic prices.  As a result, annual inflation is expected to rise to 27.5% by the end of the year.  Inflationary expectations, however, continue to improve, as shown by the 1.6 percentage point downward adjustment to the inflation estimate by panellists over last month’s forecast.  Nevertheless, the current Consensus Forecast figure still remains above the government’s 26.0% estimate.  Next year, the Consensus expects inflation to moderate but remain high at 25.4%, which is up 0.9 percentage points from last month.