Peru: GDP growth strengthens notably in Q1
Economic growth strengthened in the first quarter, coming in at 3.2% in annual terms. The reading marked the fastest pace of growth since Q3 2016 and was up from 2.2% in the last quarter of 2017. A stronger expansion in fixed investment and a less negative contribution from the external sector drove the acceleration.
Fixed investment expanded 5.1% in annual terms in Q1 on the back of rising public and private investment, following Q4’s weaker 2.8% increase. Public investment increased robustly, as public spending on reconstruction and maintenance was ramped up. Meanwhile, private fixed investment also increased, stimulated by improving terms of trade, specifically higher prices for minerals.
On the other hand, government consumption expanded 5.2% year-on-year, decelerating from the 8.3% increase recorded in Q4, mainly due subdued growth in spending by regional administrations. Private consumption in Q1 grew 3.2%, above Q4’s 2.6% rise. Household spending was underpinned by healthy credit expansion, rising wages, sustained consumer confidence and notably low inflation, although rising unemployment again limited the scope of the increase.
Thanks to higher commodity prices, the external sector’s contribution to growth improved, although it remained negative. Exports swung from a 0.7% contraction in Q4 to a 4.0% expansion in Q1, while imports increased 7.0% in Q1, broadly unchanged from Q4’s 7.1% increase. As a result, the external sector’s contribution to growth improved from minus 1.9 percentage points in Q4 to minus 0.7 percentage points in Q1. The healthy expansion in imports was driven by robust demand for capital goods.
The economy is expected to gain steam in the coming quarters, especially if the new government is able to scale up public investment to rebuild infrastructure damaged by the Coastal El Niño and improve the business climate. This should also boost consumer sentiment, underpinning household spending. Political instability remains the main downside risk to the outlook, however.