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Economy
accelerates on commerce and traditional sectors
In August,
economic activity expanded 8.9% over the same month last year. The
reading was above July’s 8.3% growth but came in slightly below market
expectations of a 9.1% expansion. The acceleration over July was caused
by faster growth in commerce (July: +9.6% year-on-year; August: +12.6% yoy)
and in the traditional sectors (agriculture, fishing and mining). In
contrast, manufacturing and construction registered slower growth in
August. Manufacturing, which accounts for 16.0% of total output,
decelerated from 7.0% annual growth in July to 5.6%. As a result of the
August reading, the annual average growth rate inched up from 9.8% in July
to 9.9%, which constitutes the fastest pace in nearly 13 years.
A
month-on-month comparison confirms the acceleration suggested by the
annual figures, as economic activity increased 0.79% over July in
seasonally adjusted terms, well above the 0.22% growth observed in the
previous month.
Outlook
for next year continues to deteriorate amid global slowdown
The
economy continues to grow at a resilient pace for the time being. While
official data for third quarter economic growth have not yet been
published, the Ministry of Economy estimates that the economy expanded
9.0% during the July-September period. The estimate is a notch above the
LatinFocus Consensus Forecast of 8.9% but denotes a deceleration compared
to the 10.9% growth recorded in the second quarter. Moreover, according
to the Ministry, the economy slowed in October and expanded 7.7%
annually. With three quarters of the year behind us, the financial market
turbulence of the last months is unlikely to dent this year’s growth
estimates. In its October Inflation Report, the Central Bank estimated
that the economy will grow 9.3% this year, more than a full percentage
point above the 8.0% estimate published in May. In the same vein,
Consensus Forecast participants expect economic growth for the full year at 8.9%, as the economy will continue
to benefit from strong domestic demand.
While
until recently, the financial sector crisis was seen as having only a
limited impact on the global economy, the latest developments in global
financial markets have rapidly changed such a notion. Consequently,
Consensus Forecast participants continue to adjust their projections and
now are expecting the developed world to enter into recession and grow
less than 0.5% next year. As a result, emerging economies will face
substantially weaker external demand and export growth, which has
constituted one of the key drivers of the current business cycle, will
wane. The industrialised world’s recession will certainly take its toll
on Peru, as 45% of the country’s exports go to these countries. Moreover,
international commodity prices have already experienced a huge correction
in recent weeks in anticipation of reduced demand growth. If the recent
trend in commodity prices does not reverse, Peru will suffer from a
slowdown in both the domestic and the external side of the economy.
According to anecdotal evidence, companies are delaying mining projects in
the country, which will curb investment growth. Private consumption, the
other engine of growth, may moderate as well in the wake of sluggish
consumer confidence. In recent months, consumer confidence has
deteriorated in the wake of the uncertainty generated by the global
financial turmoil and due to increasing inflation, which is eroding
consumers’ purchasing power. According to APOYO Consultoría, the
consumer confidence index (INDICCA, Índice de Confianza del Consumidor
de APOYO) increased 2 points in October to 41 points. Despite the
modest recovery, confidence remains well below the 50-point threshold that
separates optimism from pessimism for the ninth consecutive month.
Against this backdrop, the Central Bank expects the economy to expand 6.5%
in 2009, which is unchanged from the previous estimate reported in May.
Consensus Forecast panellists, however, continue to lower their forecast
and now expect the economy to expand 6.1%, which is 0.4 percentage points
below last month’s projection.
Inflation
climbs to ten-year high
In October,
consumer prices increased 0.61% over the previous month. The reading was
above the 0.57% price rise observed in September and also exceeded market
expectations of a 0.40% increase. The October reading was largely
influenced by higher prices for housing, utilities and household
equipment. As a result of the October price increase, annual headline
inflation rose from 6.2% in September to 6.5%, which is the highest rate
observed since September 1998. Annual core inflation, which excludes
volatile energy and food items, reached 5.5% in October, up from
September’s 5.3% rate. At the current level, annual headline inflation
more than triples the Central Bank’s 2.0% target for this year, and even
widely exceeds the ±1% tolerance margin around the target rate. In an
attempt to prevent high commodity prices and strong domestic demand from
affecting inflation expectations further, monetary officials have lifted
the reserve requirement ratios several times this year and have raised the
reference interest rate by 150 basis points since January. Amid the
recent financial market turmoil, however, the Peruvian financial sector is
facing higher financing costs in the international market, which prompted
the Central Bank to cut reserve requirement ratios at an unscheduled
policy meeting on 21 October. That said, monetary officials stated that
the Peruvian banking sector is sound and that they will continue to take
the necessary actions in order to preserve liquidity and stability in the
financial sector. Monetary officials have acknowledged that they will not
be able to meet the inflation target this year and expect inflation to end
the year between 5.5% and 6.0%. In fact, the Central Banks does not see
inflation falling back into the target range until the second half of
2009. Consensus Forecast panellists see inflation moderating only to 6.1%
by the end of this year, which is up 0.1 percentage points from last
month’s Consensus.
For next
year,
panellists expect inflation to moderate to 3.8%, which is 0.2 percentage
points below last month’s forecast. |
