Key economic indicators point towards a further strengthening of economic activity in the first quarter of this year.  However, if the current decline in oil prices persists, despite further production cutbacks, fiscal balances could promptly deteriorate.

Economic activity accelerating.  According to preliminary indications from Central Bank officials, the growth pickup observed in the fourth quarter, when the economy expanded 5.6%, is likely to have persisted in the first quarter this year but at a more moderate 4-5% pace.  Key economic data releases during the first quarter corroborate the healthy growth rate.  Despite continued tight credit conditions and high unemployment (15.8% in January), consumption growth accelerated in January, with retail sales rising 38.6% over the same month last year, up from 30.4% in December.  Durable goods retail sales registered the strongest growth rates with household equipment sales up 85.3% over January 2000.  Transport equipment part sales grew 60.7%, while machinery and equipments sales expanded 38.3%.   All categories of the Central Bank’s retail sales data grew at double-digit rates with beverage and tobacco sales experiencing the slowest growth rate at 14.6%.  More recent data from the Venezuelan Automobile Chamber (CAVENEZ) show that consumption growth continued to accelerate through the end of the first quarter, with automobile sales rising 48.9% in March over the same month last year, following 25.75% growth reported for February.

Strong expansion in industry.  Industrial production data indicate that growth also continued to proceed favourably in industry.  In the private manufacturing industry, the volume of output increased 28.3% in January over the same month last year.  The strongest growing sectors for this period were metals, machinery and equipment (+37.1%), basic metals (+36.9%) and industrial chemicals, petroleum derivatives and plastics (+33.9%).  The only sector to experience a contraction was textiles, clothing and leather production, which was down 6.9% in January over January 2000.  February data for economic activity indicate that electricity production was up 8.8% over the same month in 2000, while production in the iron and steel industries continued strong, with growth reaching 11.8% and 25.1% over the same month in 2000.

Despite the recent downward trend in oil prices, the economy is slated for growth acceleration this year as a more favourable interest rate environment, increased government spending and investment recovery prompt an increase in economic activity.  This month’s Consensus Forecast indicates that panellists remain optimistic about growth prospects for Venezuela - expecting the economy to be the third fastest growing economy after Chile and Brazil.  Nevertheless, the Consensus figure still remains below the government’s 4.5% growth projection.

Inflation continues on downward path.  Despite a monthly 0.8% uptick in consumer prices, annual inflation again dropped from 12.7% in February to 12.5% March.  The strongest price increases were registered in housing, communications and food/beverages, which rose 1.3%, 1.3% and 1.1% respectively.  The continued favourable trajectory of prices has prompted panellists again to revise inflation forecasts downward.  Nevertheless, the Consensus figure remains well above the government’s inflation target of 11% for this year.  The average inflation forecast for 2000, however, was revised upward and also remains well above the Central Banks inflation target of 7 to 8%.

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