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Government
faces stagnant economy. According to the National
Statistical Institute, economic activity remained subdued in October with
GDP increasing a meagre 0.2% compared to the same month last year.
The weak October figure follows a 0.1% contraction in September.
Unlike last month, when the downturn caught the market by surprise, this
month’s dismal reading was largely expected as the comparison base in
1999 was higher, making the respectable growth rates seen earlier this
year harder to achieve. Political effects are also beginning to show
effects, although the brunt of the political uncertainty will be felt next
year, as investments are likely to be held back until after the elections.
As in September, fishing and construction were the only sectors that
registered a contraction. The fishing industry continues to suffer
from a fishing ban and contracted 27.9%, while the construction sector
contracted as a result of cutbacks in government spending, which made the
sector suffer a 14.2% squeeze over October 1999. The manufacturing
industry reverted from the 1.5% contraction in September to 0.8% growth
but remains well below the rates seen earlier this year (+8.5% in the
first ten months over the same period last year). Commercial
activity also remained subdued, expanding only 1.6% compared to 5.9%
growth in the first ten months. The future looks anything but rosy,
as the economy will suffer from lower domestic demand following the credit
crunch, higher unemployment, and fiscal cutbacks. Accordingly,
panellists have further reduced their GDP growth projections. The
adjustments to next year’s outlook have even been more drastic.
GDP is now seen as growing at half the rate envisioned in September.
Inflation
drops. The slump in economic activity is containing
inflation. In November consumer prices remained virtually unchanged
(+0.06% over October) and the annual rate dropped to 4.0% from 4.2% in
October. Strong increases in fuels (+6.1%), water services, fruits
and alcoholic beverages were offset by price declines vegetables and fish.
Owing to the positive November reading, panellists have adjusted their
year-end inflation outlook to 4.1%, which is now almost in line with the
Central Bank’s upper inflation target of 4.0%. The reduced outlook
for domestic demand in the coming year has also impacted the forecast for
next year’s inflation rate, which is now seen at 3.8%, down from 3.9%
last month but still well above the Central Bank’s target rate of 2.5 to
3.5%.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Peru. For more details please click here.
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