Peru - Economic Briefing November 2004

Mining Emerges from Slump

Mining is beginning to resume its role as driving engine for the entire economy, replacing the fishing sector, which had spurred the economy in the past months but is suffering from less propitious climatic conditions.  Mining activity will benefit further towards the end of the year, 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 gains speed in August
In August, the economy expanded by 6.0% compared to the same month in 2003.  The reading constituted an acceleration compared to the 3.8% growth observed in the previous month and thus represented a rebound from a two-month bout of weakness, the weakest showing since December last year.  Monthly data corroborate the acceleration registered in the year-on-year comparison.  According to seasonally adjusted data, the economy expanded by 1.16% over the previous month, up from 0.36% the previous month.  The August reading consolidates an accelerated growth trend, as annual average growth inched up from 3.4% in July to 3.6%.

Mining continues to propel growth amid higher copper and gold output
The economic developments in August were characterised by strong shifts in fishing and mining, which have dominated economic activity over the past four months:  In August, mining and fuels expanded by 5.9% over the same month last year and thus ended a three-month streak of contractions.  Over the past three years, mining had been the backbone of the economy and in the first four months of this year, the sector had expanded by 12.0% over the same period last year.  However, declines in gold and zinc output, which account for almost 40% of total mining, have prompted a slump in the entire sector.  In August, gold output remained in negative territory with a 13.3% contraction, only marginally better than the 14.1% decline registered in July.  The slump is due to a severe decline in production at the Yanacocha mine, which accounts almost half of the country’s gold output.  However, production levels in zinc emerged from the 11.7% decline in July and expanded by 3.8% over August 2003, helped by strong growth at Volcán y Milpo mines.  In addition, copper output continued to grow at a fast pace.  In August, copper output expanded 30.9% over the same month last year, virtually unchanged from the July reading.  The copper sector continues to benefit from massive growth at Antamina, which in August dethroned Southern Perú Copper Corporation as the country’s largest copper producer with a market share of 45.1% compared to 42.5%.

Fishing production moderates and prompts slowdown in primary manufacturing
In contrast to the positive developments in mining, fishing output moderated notably.  In August, the fishing sector expanded by just 3.8%.  Thus, the fishing sector ended a five-month streak of double-digit growth, which had culminated in a 58.8% year-on-year expansion in July.  The slowdown was expected since the previous period of strong growth was achieved on the back of heavy contractions the prior year, amid government-imposed bans on the catch of anchovies.  In the first half of this year, the government imposed less bans owing to more favourable climatic conditions.  However, in August, a ban on anchovy fishing was again imposed in large parts of the coast.  Anchovy represents the most important species for the sector and accounts for almost half of total fishing activity. 

Manufacturing slows amid slumping input from fishing sector
The slowdown in fishing also affected primary manufacturing, which depends to a large extent on fishing as a key input.  The sector had profited significantly from the recovery in the fishing industry in the previous months.  In August, however, manufacturing based on raw materials dropped 4.0% over August 2003, following on 17.8% growth in July.  The August reading thus ends a series of three consecutive months of robust growth, which had culminated in the fastest expansion in primary manufacturing observed in almost two years.  The strong deterioration was exacerbated by a 0.9% contraction in agriculture and livestock, which, next to primary manufacturing, constituted the only sector in negative territory in August.  Growth of non-primary manufacturing, in contrast, accelerated from 6.6% in July to 7.3% in August.  The acceleration observed in the manufacturing sector was mainly due to a growth spurt in intermediate goods output, which more than doubled from 3.6% in July to 7.3% in August.  Consumer goods expanded 7.6%, virtually unchanged from the July pace and capital goods, which account only for a small part of total industrial manufacturing, drifted into negative territory following on unsustainable high growth in July.

Outlook remains solid as Camisea project will bolster growth in second half
Consensus Forecast panellists remain upbeat about growth prospects and the economy is seen as experiencing yet another year of robust growth.  In the second half, economic activity is expected to accelerate to 4.3% from 4.2% in the first half, as external demand continues to thrive and the giant Camisea project will add momentum.  For the full year, GDP should grow by 4.3%, up a notch from last month’s forecast.  The second-half boost should also provide a solid backdrop for continued robust growth next year, which is anticipated to reach 4.0%, unchanged from last month.