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Economy continues in deep recession
Gross domestic product (GDP) contracted 7.1% in the third quarter compared
to the same quarter last year. The third quarter figure represented the
seventh consecutive quarterly decline in economic activity but came in
well above market expectations, which had anticipated an even more
pronounced drop. In addition, the third quarter figure represented a
modest improvement from the 9.4% contraction registered in the second
quarter.
The oil sector continues to deteriorate. In fact, the oil economy
experienced its tenth consecutive monthly decline in the third quarter,
with activity dropping 9.0% over the same quarter last year, following on
a 2.9% contraction in the second quarter. The strong drop in the oil
industry is due to both, lower prices and volumes. In the third quarter,
the average oil price was 1.6% below the level observed for the same
period last year. Furthermore, according to estimates by the Organization
of the Petroleum Exporting Countries (OPEC), average oil production in the
third quarter, reached 2.6 million barrels per day (mbpd), 9.9% below the
output level observed in the same quarter last year. The oil sector
continues to suffer from a combination of lacking investment, amid high
policy uncertainty, and a deterioration in the managerial capacity of
state-owned oil company Petróleos de Venezuela S.A. (PDVSA). At the
beginning of the year, President Chávez fired virtually the entire
management of the company, which he accused of siding with the opposition.
The non-oil sector of the economy, in contrast, improved over the second
quarter but remained in negative territory. In the third quarter, activity
in the non-oil sector dropped 6.0%, following on the more pronounced 10.1%
contraction registered in the second quarter. The construction sector led
the non-oil economy’s drop with a 33.9% decline in activity compared to
the same quarter last year. The construction output decline represented
the seventh consecutive quarterly contraction but was better than the
devastating 59.9% and 49.9% drops in activity observed in the first and
second quarter of this year respectively. Wholesale and retail commerce
activity was the second worst performing sector, registering a 10.0% drop
in activity over the same quarter last year (Q2: 17.4% year-on-year). On
upside, public and financial services experienced healthy positive growth,
expanding 5.8% and 2.7% respectively.
Price and exchange rate controls, tight credit conditions, high
unemployment and the uncertain economic policy environment continue to
undermine any recovery from the current recession. Participants have
maintained the 11.1% GDP contraction estimate for this year, which means
that the country will experience one of the worst in its history. The
Consensus figure is still slightly above the government’s 10.7% estimate.
Growth is expected to pick up gradually next year, but policy uncertainty
is likely to overshadow prospects at least until the current political
stalemate is broken via new elections. Consensus Forecast participants
anticipate GDP to expand at a healthy 6.7%, which is up 1.4 percentage
points from last month’s forecast and is above the government’s 6.5%
estimate. However, the figure is insufficient to compensate for the
staggering declines in economic activity observed over the past two years.
Inflation remains high but contained by price and currency controls
In November, consumer prices rose 1.9% - a six month high and well above
the previous month’s 1.5% rise. Higher transportation costs and a notable
increase in food and non-alcoholic beverages prices drove the strong
monthly increase. On the low end, housing services costs actually dropped,
while education service prices were unchanged over the previous month. As
a result of the high monthly consumer price increase, the annual inflation
rate rose to 26.1% from 25.7% in October, ending five months of declining
rates. Wholesale price developments indicate that underlying inflationary
pressure persists but that businesses are not able to transfer higher
prices to consumers, amid the depressed state of domestic demand. In
November, wholesale prices rose 2.2%, which was up from 1.7% registered in
October. As a result, the annual inflation rate rose to 45.0%, up from
42.3% in the previous month. The continuation of price and exchange
controls along with depressed economic activity is containing inflation.
Consensus Forecast participants anticipate inflation to continue to rise
in the final month of the year with the annual rate reaching 28.1%, down
3.2 percentage points from last month’s forecast. The heightened economic
activity and the likelihood of devaluation in the currency next year is
likely to pass through to domestic prices. As a result, inflation is seen
as rising to 29.9%.
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