Peru: Weather woes weigh on growth in Q1
May 19, 2017
Peru’s economy shifted into a lower gear in the first quarter of 2017 as the country was hit by natural disasters, which sent confidence down and fuelled inflation. However, the external sector remained the bedrock of Peru’s growth, thanks to surging exports, in particular of minerals. In Q1, GDP grew 2.1% on an annual basis, down from 3.0% growth in Q4 2016, the lowest result in two years.
The slowdown in growth was due to adverse weather crippling domestic demand. Private consumption expanded 2.2% in Q1, which was lower than Q4’s 3.4% increase. The floods prompted by a coastal El Niño in February and March left hundreds of thousands people homeless and destroyed infrastructure. Damaged crops sent prices for fruit and vegetables through the roof and consumer sentiment dampened. Despite setting up public aid funds to mitigate the hardship, government consumption dropped 9.5%, though it was a softer fall than Q4’s 12.8%. Fixed investment contracted 7.1%, improving from Q4’s 8.7% drop.
The external sector contributed 3.0 percentage points to growth in Q1 (Q4: +2.8 percentage points). Exports rose 12.2% on the back of surging extractions of copper, petrol and natural gas. (Q4: +9.2% year-on-year). Imports climbed 0.2% in Q1, the first positive result in five quarters (Q4: -1.5% yoy).
The damage to the country’s infrastructure caused by the floods will hamper growth, though the government was granted additional fiscal room for reconstruction by parliament. Rebounding public consumption should support growth and consumer spending is likely to recover, due to a healthy labor market and lower price pressures. Moreover, the Central Bank cut the monetary policy rate in May, which will also add support to economic activity.