The government is studying the possibility to declare a “state of exception”, which would vest the President with emergency powers to fight poverty and corruption and would temporarily suspend certain constitutional guarantees.  The decision of key leaders within the MAS party, an essential government ally, not to support the President’s desire for more power has prompted the President to dissolve the governing coalition, which may hamper governability.

Economy continues on healthy path.  The economy continued to exhibit signs of expansion in the first quarter.  According to Central Bank data, retail sales were up 26.3% in February over the same month last year.  Household equipment purchases again registered the strongest growth with an 82.5% expansion over February 2000, while transport equipment part sales grew 34.8% for the same period.  On the downside, the only retail sector to experience a contraction in February was textiles and clothing, which dropped 8.7% over the same month last year.  This month’s Consensus Forecast indicates that consumption growth is expected to remain healthy but to drop off from the 4.8% expansion registered last year.   However, next year looks less propitious with consumption growth expected to moderate significantly.

Industry remains strong.  According to the Central Bank, activity in the private manufacturing industry increased 10.5% in February over the same month last year.  The strongest growing sectors for this period were non-metal products (+25.3%), industrial chemicals, petroleum derivatives and plastics (+21.3%) and the wood and furniture industry (+10.3%).  On the downside, textiles, clothing and leather production as well as basic metals output contracted 11.0% and 7.5% respectively.  Additional February data from the Central Bank for economic activity show that crude oil production rose 6.3% over February 2000, while metal parts output growth reached 21.5%.  This month’s Consensus Forecast indicates that industrial production is likely to slow this year from 3.6% registered in 2000.

Growth moderating.  Government spending is likely to be the key factor in driving this year’s growth.  While the release of official first quarter data from the Central Bank is still pending, monetary authorities claim that economic growth reached 4-5%, which is in line with this month’s Consensus Forecast.  Nevertheless, panellists anticipate that the pace of the current economic expansion will abate, with growth moderating to below the government’s 4.5% growth projection.  In 2002, growth is expected to decelerate further.

Inflation moving down.  The Central Bank reported that consumer prices rose by 1.1% in April driven by strong upticks in food and beverages (+2.5%), rent (+1.4%) as well as restaurant and hotel prices (+1.3%).  Despite the fact that the April increase was the highest so far this year, the annual inflation rate dropped further from 12.5% in March to 12.1% in April, the lowest level since 1987.  Panellists remain hesitant about adjusting inflation projections as the current downward trend in prices is not expected to persist throughout the year.  In fact, the anticipated pickup in economic activity towards the end of the year will put some upward pressure on prices and as a result annual inflation is expected rise above the Central Bank’s 11% inflation target for this year.  More accelerated currency depreciation next year is likely to pass through to domestic prices.  As a result, participants expect price pressures to increase further. 

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