Headline economic activity has relented moderately to 2.5% year-on-year amid pullback in the manufacturing sector, though the healthy expansion of mining activities remains intact.
IHS perspective | |
Significance | Economic activity measured by monthly GDP has shown moderation at 2.5% year on year due to weakness in the heavily weighted manufacturing sector, while fishing was likewise weak. |
Implications | Despite the weak manufacturing and fishing-sector data, the healthy mining-sector output, along with other service-sector components, helped more than outweigh the negativity of the contracting sectors. |
Outlook | IHS outlook for the remainder of 2016 and into the short term remains intact given expectations for healthy mining activity and stable private consumption; the 2016 GDP forecast currently calls for 3.4% growth by year-end 2016. |
Economic activity summary
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Economic activity has decelerated moderately to 2.5% year on year (y/y), with downward pressure being supplied by the manufacturing component and weakness in the fishing sector. However, healthy output has continued in the mining sector, mainly driven by copper production. The primary sector saw large gains in the production of olives, rice, cocoa, and coffee. Despite these positive developments, crops such as cotton and potato exhibited sharp to moderate declines, respectively. In the livestock and fishing component of the primary sector, activity through April brought healthy results across the board for poultry and cattle, though the fishing industry fell dramatically from strong results posted in recent months. Specifically, consumption of anchovy was the largest factor in dragging on the headline growth figure, while canned and frozen seafood products contributed to the downward pressure.
The mining sector continued its streak of robust growth rates, mainly driven by copper volume output. Peru's export prices of copper products remains in negative y/y territory, though the price level has been creeping up moderately in recent weeks and months; this effect, coupled with the massive volume output growth, helps explain the very significant effect the mining sector alone is supplying to the headline growth figure. Thus, copper revenues (the product of price and quantity effects) have risen to over 52% y/y growth through the latest data point in April 2016. Molybdenum, silver, gold and lead also showed healthy results, while other metals such as: iron, tin, and zinc showed mild to moderate contractions.
On the consumer side, spending has been supported by growing family incomes, which are a result of increasing employment opportunities, as well as healthy credit growth rates. Families have continued to show healthy propensity to consume, as evidenced by retail commerce figures, as well as the private consumption of the first quarter.
Outlook and implications
Overall, the Peruvian economy remains on a relatively stable footing, though growth is clearly extremely dependent on the gains being made in the mining sector. There is no expectation for that source of growth to dry up in the short term, and therefore that driver remains a centrepiece of IHS's economic activity forecast. We likewise expect that private consumption stays at the healthy rates we have seen in recent data releases. The forecast holds that the relatively positive employment landscape will continue, which will support family income levels, which is the foundation of the private consumption strength. Moderate international commodity prices will likewise provide support to private consumption; while prices for the inputs of consumer goods remain weak, that will tend to help keep prices favourable for consumers. Given the subdued price recovery on the horizon, we do not expect accelerations in consumer spending, though the prevailing moderate prices do not put downward pressure on this component of GDP. Regarding subdued commodity prices, and specifically regarding metals prices, the price trend is beginning to show welcome stability, and moderate growth is expected to continue throughout 2016. The moderate recovery that has been observed since the beginning of 2016 has provided some relief; however, robust and sustainable price recoveries are very unlikely. Fundamentals remain broadly unchanged, and there is little reason to expect the international environment can support any surge in metals prices. It is however similarly unlikely that prices blow through the floor established in late 2015 and early 2016; overall, prices are likely to remain near current levels or experience light growth into the short term, or it is possible to see a mild correction that would not push prices lower than the previously established lows. Fixed investment rates will be unimpressive in 2016, due to the relatively unfavourable commodity prices; however, given moderate price recovery, investment in the extractive industries will become increasingly attractive as metals prices continue their resurgence. Overall, we are projecting GDP growth near 3.4% by year-end 2016.