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Economy
expands at fastest pace in 13 years
In April,
economic activity expanded 13.3% over the same month last year. The
reading more than doubled the 5.6% growth observed in March, which was
negatively affected by the Easter holiday, and also exceeded market
expectations, which had the economy expanding 10.1%. In fact, the monthly
reading constituted the fastest pace registered in 13 years. The buoyant
pace was due to robust growth observed in fishing, manufacturing,
construction and commerce. Construction, in particular, more than doubled
the pace and expanded a staggering 33.9% year-on-year, the fastest pace
observed since May 1995. In the last twelve months, construction has
constituted one of the drivers of the current expansion and has grown more
than 19.0%, as both the public and private sectors are carrying out
important infrastructure projects in mining, communications and housing.
As a result of the April reading, the annual average growth rate jumped
from 9.1% in March to 9.6%, which is the highest growth rate observed
since November 1995.
A
month-on-month comparison confirms the strong growth observed in
April, as economic activity increased 5.74% over March in
seasonally adjusted terms.
Central
Bank raises growth forecast amid buoyant investment
While
official data for second quarter economic growth have not yet been
published, the Ministry of Economy estimates that the economy grew 10.0%
during the April-June period. The estimate is slightly above the
LatinFocus Consensus Forecast of 9.8% and denotes an acceleration compared
with the 9.3% growth recorded in the first quarter. If confirmed, the
growth rate would mark the fastest pace observed since the second quarter
of 1995. With weakening demand in major export markets and a strong
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
recent months, consumer confidence has deteriorated as increasing
inflation is eroding purchasing power, which is primarily affecting
lower-income groups. According to APOYO Consultoría, the consumer
confidence index (INDICCA, Índice de Confianza del Consumidor de APOYO)
dropped 2 points in June to 44 points. Thus, the reading remains below
the 50-point threshold that separates optimism from pessimism for the
fifth consecutive month. Despite the possibility of a slight moderation
in consumption, 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. Against this backdrop, the Central Bank recently
revised its growth forecasts upwards, from 7.0% to 8.0% for this year and
from 6.3% to 6.5% for 2009. In the same vein, Consensus Forecast
participants have raised
their
economic growth projection by 0.2 percentage points to 7.8%. In 2009,
panellists expect the economy to grow at a slower 6.5% pace, which is up
0.1 percentage points form last month’s forecast.
Inflation
close to decade-high
In June,
consumer prices increased 0.77% over the previous month. The reading more
than doubled the 0.37% rise observed in May and also came in above market
expectations, which had prices adding 0.49%. Moreover, the June increase
was broad-based, as all eight price categories rose over the previous
month. Higher prices for food and beverages as well as for transportation
and communication drove the monthly increase. As a result of the price
spike seen in June, annual headline inflation increased from 5.4% in May
to 5.7%, which is the highest rate observed since December 1998.
Moreover, the reading ended the short-lived downward trend seen in
inflation between March and May, which had suggested that inflation would
continue to moderate in the following months. At the current level,
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. Monetary officials have stated that inflation will moderate to 4.0%
by the end of the year and will not fall within the target range until the
second half of 2009. Annual core inflation, which excludes volatile
energy and food items, was at 4.7% in June, up from May’s 4.3% 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. In an attempt to prevent higher commodity prices and strong
domestic demand from affecting inflation expectations, the Central Bank
raised the reference interest rate unexpectedly on 12 June. Monetary
officials lifted the reference rate by 25 basis points to 5.75%. The next
monetary policy meeting will take place on 10 July and, given the faster
than expected price increase in June, authorities could opt to tighten
policy even further. Consensus Forecast panel sees inflation moderating
only to 4.7% by the end of this year, which is up 0.4 percentage points
from last month’s Consensus.
For next
year,
panellists expect inflation to moderate to 3.4%, which is 0.2 percentage
points above last month’s forecast. |
