Annual GDP growth slowed considerably in the last quarter of 2017, in part due to a weaker external sector, which saw exports declining and imports—especially of capital goods—rising in yearly terms. Softer household spending and fixed investment also weighed on growth.
Moving into 2018, the economy seems to have broadly maintained the moderate pace of expansion seen in 2017, which was restrained by a troubled political environment. In January and February car sales dropped year-on-year, and the unemployment rate increased. In February business confidence declined, although it remained in optimistic territory, and consumer confidence plunged to the lowest level so far during
President Kuczynski’s administration, which began in July 2016. That said, public investment continued to grow robustly in January, and in the first two months of the year credit to the private sector expanded at a healthy pace. The possibility of a new impeachment vote, following a
failed attempt in December to oust the president, is generating additional political instability.
• This year solid credit growth, accommodative monetary conditions and a strengthening mineral sector are expected to spur business investment, which, together with rising public infrastructure spending, should support fixed investment. Moreover, income gains and lower inflation will likely underpin household spending. Political uncertainty, which could further hit sentiment, remains the main downside risk to the outlook. FocusEconomics panelists see GDP expanding 3.7% in 2018,
unchanged from last month’s forecast, and 3.8% in 2019.
• Inflation dropped to a fresh multi-year low of 1.2% in February (January: 1.3%). Against a backdrop of subdued inflation and below-potential growth, the Central Bank cut the policy interest rate to 2.75% from 3.00% at its 8 March meeting. Panelists see inflation ending 2018 at 2.4% and
2019 at 2.5% investment in the mining industry, which was spurred by higher prices for
metals.
Furthermore, government consumption expanded 10.0% year-on-year, up significantly from the 2.7% uptick recorded in Q3 and mainly led by increased spending by regional and local administrations. Private consumption in Q4 grew 2.6%, broadly matching Q3’s 2.8% rise. Household spending was
underpinned by higher consumer confidence and a notable deceleration in inflation, although subdued wage growth and rising unemployment limited the scope of the increase.
Despite higher commodity prices, the external sector dragged on growth, weighed down by a contraction in net exports of copper and fishery products. Exports swung from a 7.0% expansion in Q3 to a 0.5% contraction in Q4, while imports increased 7.1% in Q4, above Q3’s 4.1% increase. As a result, the external sector’s contribution to growth swung from plus 0.9 percentage points in Q3 to minus 1.9 percentage points in Q4. The healthy expansion in imports was driven by robust demand for capital goods, especially in the mining sector.
Going forward, some improvement in labor market conditions and wages should support household spending, which expanded only moderately last year. Moreover, fiscal spending should experience a significant acceleration this year, induced by the reconstruction of housing and infrastructure affected
by the Coastal El Niño in 2017. Lastly, higher prices for metals are expected to continue fueling private investment in the mining sector. Panelists surveyed for this month’s LatinFocus report expect GDP to expand 3.7% in 2018, which is unchanged from last month’s projection. For 2019, the
panel expects the economy to grow 3.8%.
REAL SECTOR | Pace of economic expansion slows further in December Economic activity continued to lose steam in December, increasing just 1.3% year-on-year, down from November’s already subdued 1.8% expansion. December’s slowdown marked the third consecutive month of softening growth. In 2017 overall, economic activity grew 2.5%, decelerating considerably from
the 4.0% expansion logged in 2016. A supportive external sector was once again behind the expansion in December, led by growth in sales of fishing, metal-mechanical, chemical,
textile and mining products to overseas markets. That said, the annual pace of export growth in December was considerably weaker than in the previous month. Household consumption continued to increase in the month, also at a much softer pace than in November. It was reflected in expanding consumer credit, rising imports of non-durable consumer goods and slow growth in retail
sales. Annual growth in December was generally broad-based, with the mining, construction, agricultural, telecommunication, trade and transport sectors leading the way. The construction sector continued to benefit from rising public infrastructure expenditure, as well as from expanding office building activity. On the downside, the contractions in both the manufacturing and the
fishing sectors sharpened from the prior month. Despite the decrease in the headline print, annual average variation in economic activity came in at 2.5% in December, marginally up from November’s 2.4%.
OUTLOOK | Consumer confidence falls notably in February The consumer confidence indicator published by GfK dropped further in February, coming in at 84. The result is strongly down from 91 in the prior month and marks the best reading during the Kuczynski administration.
The indicator thus moved further below the crucial 100-point threshold that indicates pessimism among Peruvian consumers, where it has remained for the fourth consecutive month. Consumers grew more pessimistic as they broadly believed that economic growth is weakening, and that the government is not taking sufficient measures to revive the economy. Kuczynski’s approval
rating has reached a low of 15%. Confidence dropped in all geographical areas surveyed.
Respondents largely perceived the economy to be growing, but at a softer pace than before. Moreover, the number of respondents who believed growth has stalled increased from January. Additionally, the number of households who expected that their personal economic situations would improve in the next 12 months declined. Furthermore, the number of households that
expressed discontent with the government’s actions continued to grow, and now represents over two thirds of respondents. Furthermore, fewer households expected economic growth to pick up pace.
Panelists surveyed for this month’s LatinFocus report expect private consumption to expand 3.2% in 2018, which is down 0.1 percentage points from last month’s estimate. In 2019, panelists expect private consumption to grow 3.7%.
OUTLOOK | Business confidence worsens in February The business confidence indicator dropped to 54.9 in February, significantly below January’s 58.5. Despite the decline, the indicator remained above the 50-point threshold that separates optimism from pessimism, indicating that businesses grew more optimistic in February. Driving the decline in business sentiment was an almost broad-based
deterioration in both assessments of the current business situation and expectations on the future. In particular, firms had a less favorable assessments of their current sales and production levels as well as of new business orders. Moreover, they had less optimistic expectations about the general economic situation, their specific sector of activity and their own company in the next
three and twelve months. Panelists expect fixed investment to grow 4.8% in 2018, which is down 0.4
percentage points from last month’s forecast. For 2019, panel participants also see investment growing 4.8%.
MONETARY SECTOR | Inflation reaches fresh multi-year low in February Consumer prices in Metropolitan Lima increased 0.25% in February on a monthly basis, above January’s 0.13% rise. February’s increase was mainly the result of higher prices for rental housing, fuels and electricity and
education and culture. On the other hand, lower prices were recorded for fruit.
The increase in the prices for housing, fuel and electricity was again due to an increase in tariffs for residential electricity. Meanwhile, inflation continued to moderate. It dropped to 1.2% in February
from 1.3% in January, the lowest since May 2010. In February core consumer prices, which exclude energy and food, increased 0.1% from the previous month, down from January’s 0.2% rise. Finally, core inflation inched down to 2.2% from January’s 2.3%.
The Central Bank expects inflation to end both 2018 and 2019 at 2.0%. Panelists participating in the LatinFocus Consensus Forecast expect inflation to end 2018 at 2.4%, which is unchanged from last month’s projection. For 2019, the panel expects inflation of 2.5%.
MONETARY SECTOR | Central Bank cuts policy interest rate for the second time this year in March
At its 8 March monetary policy meeting, the Central Bank of Peru (BCRP) decided to cut the policy interest rate from 3.00% to 2.75%, following a cut of the same magnitude at its January meeting. The Bank’s decision was motivated by declining inflation and inflation expectations, below-potential
economic growth and weakening business confidence. Inflation dropped further from 1.3% in January to 1.2% in February, coming in below the mid-point of the Central Bank’s target range of 1.0% to 3.0% for the fourth consecutive month. A reversal of the supply shocks due to the Coastal
El Niño recorded last year was again behind the slowdown. Inflation not counting foodstuff and energy remained stable at a low level, while headline inflation expectations for the next 12 months fell. Moreover, economic activity expanded below potential in Q4: GDP growth decelerated, dragged down by the external sector; fixed investment also expanded at a more moderate pace than in the previous quarter. Additionally, business sentiment weakened significantly in February, although it remained in optimistic territory. In the same month, consumer sentiment plunged,
remaining deeply entrenched in pessimistic territory. Consequently, the Bank expects inflation to moderate further early this year and converge to its 2.0% target afterwards.
The Bank’s statement was devoid of strong forward guidance. The BCRP expressed, however, its readiness to modify its monetary policy stance if new information on inflation were to make it necessary. The next monetary policy meeting will be held on 12 April.
Our panelists see the monetary policy rate at 2.94% at the end of 2018. For 2019, the panel projects a rate of 3.56% at the end of the year.
EXTERNAL SECTOR | Trade surplus narrows in January Peru’s trade balance recorded a USD 582 million surplus in January, a substantial decrease from December’s USD 1.1 billion surplus but above the
USD 333 million surplus recorded in the same month of last year. Growth in exports strengthened considerably in January, accelerating to 20.6% year-on-year from December’s 7.3% expansion. Growth came mainly on the back of a higher mining, metal-mechanical and oil shipments. Agricultural exports, on the other hand, continued to drop significantly. Meanwhile, imports
rose 14.2% annually in January, above December’s 9.7% growth. In the 12 months leading up to January, the trade surplus was USD 6.5 billion, above December’s USD 6.3 billion.
Panelists participating in the LatinFocus Consensus Forecast see exports growing 4.2% in 2018 and the trade balance recording a surplus of USD 5.5 billion. For 2019, the panel sees overseas sales expanding 5.9% and forecasts a trade surplus of USD 5.3 billion.
FUENTE: Por Focus Economics- https://www.focus-economics.com/ Desde Barcelona España-
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