Peru: GDP growth weakens in Q4, dragged down by the external sector
Economic growth weakened in the fourth quarter, coming in at 2.2% in annual terms, down from 2.9% in the third quarter. Although a notable deterioration in net exports dragged on growth, stronger government spending and the second consecutive year-on-year expansion in fixed investment following three years of contraction drove economic growth. Q4’s result brought growth for 2017 as a whole to 2.5%, well below the 4.0% expansion recorded in 2016.
Fixed investment expanded 4.4% in annual terms in Q4 on the back of rising public and private investment, following Q3’s stronger 5.2% increase. Public investment expanded robustly, benefitting from a low base of comparison, as the all levels of government increased spending on infrastructure projects. Meanwhile, private fixed investment also increased, led by a recovery in investment in the mining industry, which was spurred by higher prices for metals.
Furthermore, government consumption expanded 10.0% year-on-year, up significantly from the 2.7% uptick recorded in Q3 and mainly led by increased spending by regional and local administrations. Private consumption in Q4 grew 2.6%, broadly matching Q3’s 2.8% rise. Household spending was underpinned by higher consumer confidence and a notable deceleration in inflation, although subdued wage growth and rising unemployment limited the scope of the increase.
Despite higher commodity prices, the external sector dragged on growth, weighed down by a contraction in net exports of copper and fishery products. Exports swung from a 7.0% expansion in Q3 to a 0.5% contraction in Q4, while imports increased 7.1% in Q4, above Q3’s 4.1% increase. As a result, the external sector’s contribution to growth swung from plus 0.9 percentage points in Q3 to minus 1.9 percentage points in Q4. The healthy expansion in imports was driven by robust demand for capital goods, especially in the mining sector.
Going forward, some improvement in labor market conditions and wages should support household spending, which expanded only moderately last year. Moreover, fiscal spending should experience a significant acceleration this year, induced by the reconstruction of housing and infrastructure affected by the Coastal El Niño in 2017. Lastly, higher prices for metals are expected to continue fueling private investment in the mining sector.