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Growth above
9.0% for second consecutive quarter
According to
data published by the Central Bank on 30 May, gross domestic product (GDP)
expanded 9.3% in the first quarter compared to the same period last year.
The reading came in below the 9.7% growth observed in the fourth quarter
but was slightly above last month’s Consensus Forecast of 9.0%. The
deceleration over the previous quarter was mainly due to a slight slowdown
in domestic demand. Total consumption decelerated from 8.6% growth in the
fourth quarter to 8.1%. In contrast, investment picked up the pace and
expanded 23.3% (Q4: +22.6% year-on-year), which marked the fourth
consecutive quarter expanding above 20.0%. In the external sector,
exports of goods and services more than doubled the pace (Q4 2007: +5.2%
yoy; Q1 2008: +13.0% yoy), but imports accelerated even more (Q4 2007:
+12.5% yoy; Q1 2008: +20.0% yoy). Thus, the net contribution from the
external sector to overall growth diminished. At the sector level, the
deceleration over the fourth quarter was mainly the result of a slowdown
in mining, manufacturing and agriculture.
Poverty
drops amid fast economic growth
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 May to 46 points, the figure is still
below the 50-point threshold that separates optimism from pessimism. That
said, Minister of Economy Luis Carranza recently highlighted that Peru’s
poverty rate dropped from 44.5% in 2006 to 39.3% last year. Lower poverty
levels are the result of last year’s faster economic growth (9.0% for the
full year) and should support consumption during this year. Moreover, the
economy has entered a virtuous cycle in which dynamic investment (growing
above 20% for four consecutive quarters) and social programmes implemented
by the government are creating new jobs, thus reducing poverty and
boosting consumption, which in turn encourages additional investments.
Inflation remains the main risk to this cycle, as it could erode
consumers’ purchasing power. Meanwhile, in the external sector, the
government continues to encourage trade ties with key economies in major
economic regions. On 29 May, the García administration signed free trade
agreements with Canada and Singapore. The agreements will boost
agricultural and textile exports to both countries. Simultaneously, Peru
will benefit from lower prices for goods such as electronic products from
Singapore and wheat from Canada – a top wheat exporter. The government is
also seeking trade accords with China, Mexico and the European Union. The
government expects the economy to grow 7.0% this year. 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
7.6%. In 2009, panellists expect the economy to grow at a slower 6.4%
pace, which is up 0.1 percentage points form last month’s forecast.
Inflation
drops a notch in May
In May,
consumer prices increased 0.37% over the previous month. The reading more
than doubled the 0.15% rise observed in April and also came in above
market expectations, which had prices adding 0.29%. Moreover, the May
increase was broad-based, as seven out of the eight price categories rose
over the previous month. Higher prices for food and beverages as well as
for clothing and footwear drove the monthly increase. Owing to the
subdued price increase observed in May, annual headline inflation inched
down a notch from 5.5% in April to 5.4%, which is the lowest rate observed
in three months. Thus, the reading seems to confirm the end of the upward
trend seen in inflation since May last year. 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. Annual core inflation, which excludes volatile energy and
food items, was at 4.3% in May, up from April’s 3.9% rate and also above
the upper-end of the Central Bank’s target. The increase observed in
annual core inflation in the last fourteen 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.
Amid the recent moderation in inflation, monetary officials decided to
leave the reference interest rate unchanged at 5.5% at the last policy
meeting held on 8 May. Central Bank President Julio Velarde stated that
if inflation continues to moderate, there will be no reason to again raise
either the reference rate or the reserve requirement ratios. The next
monetary policy meeting will take place on 12 June. According to Velarde,
inflation will moderate during the next months and finish the year at
around 4.0%. Consensus Forecast panel sees inflation moderating only to
4.3% by the end of this year, which is up 0.1 percentage points form last
month’s Consensus.
For next
year,
panellists expect inflation to moderate to 3.2%, which is unchanged from
last month’s forecast.
Current
account balance swings into deficit
In the first
quarter, the current account balance incurred a deficit of US$ 655
million. The figure contrasted the US$ 92 million surplus observed in the
first quarter of last year and the US$ 544 million surplus registered in
the previous quarter. Moreover, the first quarter reading constitutes the
first quarterly current account deficit registered in two years. The
deterioration over the previous quarter was mainly due to a decline in the
trade surplus, which diminished from US$ 2.3 billion to US$ 1.5 billion.
Exports more than doubled the pace, accelerating from 16.2% year-on-year
growth in the fourth quarter to 34.6%. Simultaneously, however, imports
picked up pronouncedly, from 34.2% year-on-year growth in the fourth
quarter to 48.8%. As a result of the first quarter reading, the moving
annual current account balance dropped from a US$ 1.5 billion surplus in
the fourth quarter to a US$ 757 million surplus in the first. Consensus
Forecast participants anticipate the current account to revert into a
deficit of US$ 1.2 million by the end of this year. |
