Peru: GDP falls at sharpest rate in 19 years in Q1
Economic activity shrank 3.4% year-on-year in the first quarter of the year, the fastest contraction since Q1 2001, after expanding 1.8% in Q4 2019.
Hampered by Covid-19 fallout, the downturn was spearheaded by a severe contraction in the external sector, which subtracted 2.2 percentage points from the overall outturn (Q4: 0.0% year-on-year). Exports plummeted at the fastest rate in nearly three decades (Q1 2020: -13.6% yoy; Q4 2019: +1.3% yoy), dragged lower by slack international demand and constrained output of key commodities amid the coronavirus-related lockdown measures. Meanwhile, imports fell 6.4% in the quarter (Q4 2019: +1.7% yoy), reflecting weakening domestic demand.
Domestically, notable contractions in private spending and investment caused domestic demand to sink 1.2% (Q4 2019: +1.9% yoy). Private consumption fell 1.7% in the first quarter (Q4 2019: +3.0% yoy), the first such contraction since Q4 2001, as lockdown measures paralyzed economic activity, impacted the labor market and hammered consumer confidence. Furthermore, fixed investment dropped at the sharpest rate in 19 years (Q1 2020: -12.9%; Q4 2019: -0.9% yoy) as the pandemic heightened uncertainty across all sectors of the economy. In contrast, government spending rose sharply (Q1 2020: +6.5%; Q4 2019: +2.7%); Peru’s fiscal response, which amounts to around 12% of GDP, is one of the most comprehensive in the region.
The economic downturn is expected to worsen in the second quarter of this year, as the full effects of lockdown measures take grip. Domestic demand is set to shrink throughout 2020, before rebounding in the first quarter of 2021. Robust external reserves and low debt levels should allow for continued fiscal support, while the pace of recovery in external demand for key commodities presents a key risk to the outlook.
Assessing Peru’s economic outlook, the research team at Creditcorp Capital noted:
“The rhythm of recovery in the upcoming months will depend on: (i) the number of additional lockdown days this year (70, as of today), (ii) the installed capacity utilization and the convergence towards a “new normality”, (iii) the effectiveness of economic measures (~20% of GDP, counting both public and private resources), (iv) the recovery of global economic activity, and (v) the preservation of Peru’s sound macroeconomic fundamentals that have been built in the past 30 years.”