Peru - Economic Briefing September 2004

Dent in Mining Prompts Slowdown but Prospects Solid

Despite a temporary dent in growth, the mining sector remains the fundamental pillar of the economy.  In the coming months, mining will once again buttress economic activity, as the giant Camisea gas project ramps up operations.  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 next year.

Economy develops below expectations in June
In June, the economy expanded by 3.0% compared to the same month in 2003.  The reading was below market expectations, which had anticipated that growth would come in around 3.3% in the final month of the second quarter.  Instead, the June reading was well below the already weak 3.7% growth registered in May.  In fact, the June reading represented the weakest showing since December last year.  The main reason behind the slowdown was the mining sector, which saw activity drop by 2.5% over the same month last year, amid weaker zinc and gold output.  The June decline in mining represented the first contraction since December 2002.  Nevertheless, according to seasonally adjusted data, the economy expanded 0.86% over the preceding month compared to a 0.71% decline in May. 

Economy loses vigour in second quarter amid external sector slowdown
In the second quarter, the economy expanded by 3.6% over the same period last year, which represented a slowdown compared to the 4.9% growth recorded in the first quarter but was in line with last month’s Consensus Forecast.  The slowdown in the second quarter was mostly due to the external sector, where export growth more than halved from 13.8% in the first quarter this year to 5.4% in the second, while imports which are a subtraction in the calculation of GDP, accelerated from 1.5% to 12.4%. Domestic demand, in contrast, picked up considerably, as growth jumped from 2.7% in the first quarter to 4.6% in the second.  The resilience of domestic demand is mainly due to stronger investment, as consumption remained unchanged.  Gross fixed investment increased by 7.2% in the second quarter, following on 5.3% growth in the first, amid higher private investment.  Public investment, on the other hand, contracted at a faster pace than in the first quarter (Q2: -14.6% year-on-year, Q1: -11.9% yoy).  Private investment growth – which picked up from 8.0% to 11.7% growth – was associated with projects related to the mining industry, such as plant expansions or purchases of machinery. To a lesser extent telecommunications projects also helped bolster private investment.  Public investment declined in the wake of lower capital spending executed by central government and by some public enterprises, namely Petroperu and Sedapal.

Consumption remains stable as stronger public spending offsets slower private consumption growth
Total consumption continued to grow at the same 2.8% pace observed in the first quarter, as a slight slowdown in private consumption (Q2: +2.8% yoy, Q1: +3.1% yoy) was compensated for by public consumption, which turned from a 0.3% contraction in the first quarter to a 3.1% expansion.  Private consumption was buttressed by strong growth in consumption credit and automobiles sales. Department store and supermarket sales also improved, amid rising urban employment. The strong shift in public consumption followed a 7.5% increase in salaries, which offset a fall in goods and services spending.

Mining slumps amid weaker gold and zinc output and in spite of resilient copper
Mining was the main cause for the slowdown observed between the first and the second quarter.  In the second quarter, mining expanded a paltry 2.5% over the same quarter last year, following on 12.4% annual growth registered in the first quarter.  Over the past two years mining constituted the principal growth engine for Peru and the second quarter represents the weakest quarter since 2001.  The output contraction in zinc and gold was responsible for the sudden slump in mining.  Zinc production dropped in the wake of considerable declines at the Antamina mine, as the ore contains an increasingly lower concentration of the metal.  Gold output weakened amid reduced extractions at the Yanacocha and Barrick Misquichilca mines, which account for more than half of total gold production.  Copper, in contrast, which constitutes the main metal commodity group together with zinc and gold, continued to expand at double-digit rates amid the fast ramp up of mining operations at the BHP Billiton Tintaya mine, after activity resumed in October 2003.   The mine now accounts for 7.3% of total copper output and is thus the third largest copper mine after Southern Perú Cooper Corporation (38.2%) and Antamina (48.8%). 

Strong fishing buttresses primary manufacturing
On the positive end of the spectrum, fishing experienced the most notable improvement, as growth virtually doubled from 13.1% in the first quarter to 26.0% in the second.  The sector profited from particularly from strong anchovy catches in May and June, when harvesting of the species was authorised during more days than in 2003, among favourable climatic conditions.  Anchovies are the most important species for the fishing sector, where they account for almost half of total output.  Primary manufacturing, which depends to a large extent on fishing as a key input, also profited from the strong recovery in the fishing industry.  In the second quarter, manufacturing based on raw materials increased 7.1% over the same period 2003, following on only 1.5% annual growth in the first quarter.  The strong rebound came in spite of a 4.6% contraction in agriculture and livestock (Q1: +1.8% year-on-year), which constituted the only sector in negative territory in the second quarter.  Growth of non-primary manufacturing also accelerated, albeit less spectacularly, from 5.5% in the first quarter to 5.9% in the second.  

Outlook remains solid as Camisea project will bolster growth in second half
Consensus Forecast panellists remain upbeat about growth prospects.  With external demand thriving and the giant Camisea project to fuel the growth in the second half of the year, the economy is seen as experiencing yet another year of robust growth.  For the full year, GDP should grow by 4.2%, unchanged from last month’s forecast.  Thus, the current Consensus is bang in line with the government’s 4.2% estimate and just a nick short of the latest Central Bank assessment from 10 September, which has GDP growing 4.3%, up from its previous 4.0% projection.  The second-half boost should also provide a solid backdrop for continued robust growth next year, which is anticipated to reach 3.8%, which is well below the Central Bank’s and government’s 4.5% forecast.