In the second quarter, the economy took a
deep nosedive only narrowly avoiding a double-digit recession. Despite
higher oil prices, an expected recovery in economic activity is not emerging,
as the political state-of-play continues to maintain private sector
investment at bay while the weakening currency and higher inflation
undermines a domestic demand pick up.
Recession deepens in second quarter amid oil slump
According to the Central Bank, gross domestic product (GDP) dropped 9.9%
in the second quarter over the same quarter last year. The second quarter
reading was well below market expectations of 5.5% and more than twice the
4% drop the Central Bank had anticipated as recently as last month. The
strong second quarter decline brought growth down 7.1% in the first half
over the same period last year. The second quarter contraction was driven
by a 12.2% decline (Q1: -6.1% year-on-year) in public sector activity,
whereas private sector output dropped by 8.5% for the same period (Q1:
On a sectoral basis, the oil industry dipped deeper into recession with a
stunning 16.7% decline in activity over the same quarter last year – the
fifth consecutive drop and down further from the 7.7% contraction in the
first quarter. According to the Central Bank, the drop in the oil economy
can be attributed principally to the OPEC-induced production cutbacks
adopted by Venezuela this year and declines in refinery production
resulting from lower global demand. In the past year and a half, Venezuela
cut the country’s oil output quota three times by a total of 406,000
barrels per day (bpd) to the current 2.67 million bpd production level.
Meanwhile, at US$ 21.90 per barrel, the average oil price for the
Venezuelan mix of crude oils remained only marginally higher in the second
quarter 2002 than for the same quarter last year, when the price averaged
US$ 21.71 per barrel. The strong rebound of the oil price in the first two
months of the third quarter promises to give the sector a boost. On 6
September, the oil price reached US$ 24.86 per barrel, which helped raise
the average price for the third quarter to US$23.88 per barrel, 13.9%
above the average price in Q3 2001. In addition, oil production may
receive a boost. With the global recovery in oil demand and storage levels
reverting back to normal, OPEC may be considering a boost to oil
production quotas in its 19 September Osaka meeting, which would serve to
further boost the oil economy.
The recession in construction deepened further in the second quarter, with
activity dropping 30.8%, which was significantly below the 7.1% decline
observed in the first quarter. The slump in construction activity is
likely to prompt a further increase in unemployment, which reached 16.3%
in June (15.2% in May), given the labour intensive nature of the sector.
Commerce was the second-worst performing non-oil sector, with activity
down 11.8% over the same quarter last year (Q1: -5.7%), followed by
transport and storage, which experienced a 10.1% decline (Q1: -3.5%).
Communications and electricity and water were the only sectors to register
positive growth rates with 3.5% and 2.4% expansions respectively.
On the investment side, firms continued to battle tight credit conditions,
an uncertain macroeconomic policy environment and devaluation, while
consumption remains constrained by the purchasing power eroding effect of
the currency weakening and high unemployment. The prospects for continued
depressed domestic demand and the poor first half performance of the
economy have prompted participants to lower growth forecasts for this year
yet again with GDP now down 0.5 percentage points from last month.
Panellists have also revised their growth forecasts downward for next year
by 0.2 percentage points from last month
to well below the government’s 3.5% to 4.5% growth
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Venezuela. For more details please click here.