Venezuela - Economic Briefing October 2004

Oil Prices Propel Economy Forward (continued)

Unemployment develops favourably
Unemployment indicators show that the economy continues to develop favourably.  According to the National Statistical Institute (INE), unemployment dropped to 14.2% in August, which was down from 15.3% the prior month and well below the 17.8% observed in the same month last year.  In August, the annual average unemployment rate reached 16.1%, which represented a 0.3 percentage point improvement over prior month.  To a large extent the current downward trend in unemployment is attributable to the recovery in the labour-intensive construction industry, which has experienced two consecutive banner quarters of double-digit growth.

Outlook remains favourable but growth likely to moderate
Consensus Forecast participants expect the current healthy pace of economic activity to moderate, despite favourable prospects for continued high oil prices at least through the end of this year.  Gross domestic product (GDP) growth is seen as decelerating to less than half the pace of the second quarter at 5.4%.  Furthermore, growth is anticipated to slow further in the final quarter to 3.0%, as the stronger comparison base of last year begins to kick in.  Nevertheless, full year GDP growth is seen as reaching 11.9%, which is up 1.5 percentage points from last month.  The current Consensus Forecast figure is now well above the 9% to 10% government estimate.  Next year, however, the moderating growth trend of the second half of this year is likely to carry over, as the economy is anticipated to expand at a much more moderate 4.1%, up a 0.6 percentage points from last month’s Consensus Forecast estimate.

Consumer prices remained subdued amid controls
In September, consumer prices rose 0.52%, which was down from the 1.34% increase observed the prior month and represented the lowest monthly increase since February 2001.  Education and health costs were the main factors offsetting a more modest price rise, as virtually all other sectors experienced moderate increases.  As a result of the September reading, annual inflation dropped from 21.9% in August to 20.8%.  Despite the favourable September figure, Consensus Forecast panellists expect annual inflation to accelerate by the end of this year, as a potential exchange rate devaluation would raise pressure on domestic prices.  As a result, inflation is seen at 22.8% by the end of the year.  Inflationary expectations, however, continue to improve, as shown by the 3.3 percentage point downward adjustment to the inflation estimate by panellists over last month’s forecast.  Moreover, at its current level, the Consensus Forecast figure is now below government’s 26.0% estimate.  Next year, however, the Consensus expects inflation to rise to 25.2%, which is also down 3.0 percentage points from last month.