Peru: Economy slows down in fourth quarter
February 17, 2017
Peru’s economy decelerated in the fourth quarter of 2016 as the government is following through with austerity measures and investment is declingin. On the upside, a buoyant external sector is cushioning the overall slowdown. In Q4, GDP grew 3.0% on an annual basis, just below LatinFocus panelists’ forecast of 3.1% growth and well below Q3’s 4.5% increase. Matching LatinFocus panelists’ projection, GDP grew 3.8% in 2016 as a whole, picking up from 2015’s 3.3% expansion. Although Peru’s regional peers faced economic hardships last year, the country’s economy has been able to resist the headwinds with strong private consumption and exports, mainly those of traditional Peruvian goods.
Exports of goods and services were again the main engine of growth in Q4, despite having decelerated to a 9.2% annual increase from Q3’s 11.8% growth. Thanks to large-scale investment in extraction plants in previous years, Peru’s mining sector shored up capacity over the course of the year. Copper exports were particularly strong. Meanwhile, imports contracted for the fourth consecutive quarter, deteriorating from a 1.0% contraction in Q3 to a 1.6% fall in Q4.
On the domestic side of the economy, private consumption expanded 3.1% in Q4, which was lower than Q3’s 3.5% increase, as dampened consumer sentiment and a weather-induced spike in food prices dragged on household expenditure. Government consumption plunged 12.8% year-on-year, which contrasted Q3’s 1.7% expansion and was the worst result on record. In a bid to decrease the fiscal deficit in line with the fiscal responsibility law, authorities have been cutting expenses. Meanwhile, fixed investment contracted 8.7% year-on-year, worsening from Q3’s 6.7% drop. The contraction in fixed investment seen over the last quarters reflects lower levels of investment, as big infrastructure projects, especially in the mining sector, are being finalized.
Sequential data show that GDP in Q4 grew 0.4% from the previous quarter, which came in below Q3’s 1.3% increase. Going forward, the external sector will continue to buttress economic activity, which should translate to improved private consumption. However, the corruption scandal around Odebrecht has led to several large infrastructure projects being frozen, adding downside risks to the country’s economic outlook.