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Economy
grows at fastest pace in twelve years
In
February, economic activity expanded 11.9% over the same month last year.
The reading was above the already strong 10.1% growth observed in January
and exceeded market expectations, which had the economy expanding 9.8%.
In fact, the monthly reading constitutes the fastest pace registered since
May 1995. The February acceleration was mainly caused by a pick-up
observed in mining, manufacturing and construction. Mining, which
accounts for nearly 5.0% of total output rebounded strongly and expanded
14.7% annually in February, far above the meagre 2.8% growth registered in
January. Manufacturing, which accounts for nearly 16.0% of total output,
increased 13.4% in February (January: +10.0% year-on-year). In addition,
construction (5.6% of total output) expanded 22.5% (January: +21.0% yoy).
In the last twelve months, construction, one of the drivers of the current
expansion, has grown more than 19.0%, as both the public and private
sectors are embarking on important infrastructure projects in mining,
communications and housing. As a result of the February reading, the
annual average growth rate inched up from 9.0% in January to 9.2%, which
is the highest growth rate observed since November 1995.
A
month-on-month comparison confirms the strong growth observed in
February,
as economic activity increased 2.60% over January in seasonally adjusted
terms.
Outlook
continues to improve
While
official data for first quarter economic growth have not yet been
published, government officials estimate that the economy grew 9.3% during
the first three months of the year. The estimate is slightly above the
LatinFocus Consensus Forecast of 9.0%, but denotes a moderation compared
to the 9.7% growth recorded in the final quarter of 2007. The softer
economic growth trend will continue throughout the year, resulting in a
more moderate expansion, following on last year’s record pace. With
weakening demand in major export markets and a stronger currency, domestic
demand is likely to remain the key driver of economic growth. In
particular, investment will maintain the dynamic growth observed in recent
years, supported by both private and public investment. On the other
hand, private consumption, the other key engine of growth, may moderate in
the wake of sluggish consumer confidence. In the last months, consumer
confidence deteriorated as increasing inflation is eroding purchasing
power, which is primarily affecting lower-income groups. Although
APOYO
Consultoría’s
consumer confidence index (INDICCA, Índice de Confianza del Consumidor
de APOYO) inched up 1 point in April to 45 points, the figure is still
below the 50-point threshold that separates optimism from pessimism.
Despite the possibility of a moderation in consumption, the Minister of
Economy Luis Carranza expects the economy to grow 7.0% this year.
According to Carranza, private investment will spur economic growth in
2008 and thus compensate for weaker private consumption. The Central Bank
is even more optimistic, foreseeing the economy to expand 7.5%. Consensus
Forecast participants have raised
their
economic growth projection by 0.3 percentage points to 7.3%. In 2009,
panellists expect the economy to grow at a slower 6.3% pace, which is up
0.1 percentage points form last month’s forecast.
Inflation
stops upward trend
In April,
consumer prices increased 0.15% over the previous month. The reading was
well below the pronounced 1.04% rise observed in March and also came in
below market expectations, which had prices adding 0.45%. Moreover, the
monthly variation represents the slowest pace observed in six months.
Lower transport and communication prices helped to mitigate price
increases across all other categories that compose the index. As a result
of the more subdued monthly reading, annual headline inflation remained
unchanged at March’s 5.5% rate, which had marked the highest rate
registered since December 1998. At the current rate, however, annual
headline inflation surpasses the Central Bank’s 2.0% target for this year,
and even exceeds the ±1% tolerance margin around the target rate. In
addition, annual core inflation, which excludes volatile energy and food
items, was at 3.9% in April, up from March’s 3.6% rate and also above the
upper-end of the Central Bank’s target. The increase observed in annual
core inflation in the last ten months indicates that higher food and
energy prices, which are largely influenced by developments in
international markets, are passing through to the rest of the economy. In
addition, the robust domestic demand growth observed in the last quarters
is also exerting pressure on consumer prices. Against this backdrop, and
in order to avoid an overheating of the economy, monetary officials
tightened the reins unexpectedly at the monetary policy meeting held on 10
April. The reference rate was lifted by 25 basis points to 5.50%.
Simultaneously, the Central Bank decided to raise reserve requirement
ratios for different kinds of bank deposits in order to avoid a faster
appreciation of the currency. In particular, officials raised reserve
requirements on local currency deposits held by non-residents from 40.0%
to 120.0%. Following on this measure, the currency stopped the strong
appreciation trend observed during the last months and depreciated 3.60%
nominally in April to 2.85 nuevos soles to the US$. Consensus
Forecast participants, however, expect the currency to resume the
appreciation trend in the coming months. Given the recent developments in
inflation, monetary officials left unchanged the reference rate at the
last policy meeting held on 8 May. Despite the latest monetary policy
decisions, the Consensus Forecast panel sees inflation moderating only to
4.2% by the end of this year, which is up 0.6 percentage points form last
month’s Consensus.
For next
year,
panellists expect inflation to moderate to 3.2%, which is 0.3 percentage
points above last month’s forecast. |
