Economic growth continues to be disproportionately supported by the mining sector, mainly from copper volume output; inflation rates continue to move downward towards the target range, with interest rates staying put near the historical long-term average.
IHS Markit perspective | |
Significance | Through the May economic activity data economic growth came in at 4.9% year on year as a result of massive mining-sector growth and despite the heavily weighted manufacturing sector showing weakness. |
Implications | The healthy mining-sector output, along with other service-sector components, helped more than outweigh the negativity of the contracting sectors. Broad stability in prices and interest rates will bolster economic growth. |
Outlook | The remainder of 2016 will see a continuation of healthy mining activity coupled with stable private consumption; the 2016 GDP forecast currently calls for 3.3% growth by year-end 2016. |
Economic growth summary
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Economic growth has accelerated healthily to 4.9% year on year (y/y), though manufacturing data again came in weak, although it was not enough to push back the extreme growth of the mining sector. Extreme growth in the volume of output of copper continues to boost headline growth rates. The mining sector as a whole grew 33.2% month on month (m/m), while the y/y rate stands at 15.7%; the mining sector has produced record-setting y/y growth rates in the last 12 months. Specifically, copper output grew at a 63.9% m/m rate, while iron also saw very strong growth at 34.9% m/m. The hydrocarbon portion of the mining sector likewise produced strong results after a broad trend of weakness. Natural gas and liquid natural gas both grew healthily, although crude oil output contracted.
The manufacturing-sector result was again weak in the May data, primarily driven by weakness in the primary industrial manufacturing sector (production involved with non-ferrous and precious metals). Also, manufacturing related to the processing of fish and fish by-products was weak due to the very poor intake of fish products in the May data (fishing sector as a whole declined 66.9% m/m). However, fishing-sector output is extremely volatile, and therefore the massive decline should be understood as part of a sector that frequently grows and contracts at double digit rates.
The mining sector has shown an ability to boost headline growth at a time when the Peruvian economy overall would otherwise be growing at a relatively subdued rate. Peru's export prices of copper products remain in negative y/y territory, although prices have seen some recovery in 2016; this effect, coupled with the massive volume output growth, helps explain the very significant impact the mining sector alone is supplying to the headline growth figure. Terms of trade have slid again modestly through the May data, though in general export and import prices are considerably more favourable relative to early 2016.
Headline inflation and interest rates summary
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Top-line GDP growth is projected to remain below potential for 2016, as well as into 2017; the current policy rate at 4.25% is accommodative and will tend to promote economic activity at a time when Peru is in need of additional support. Headline inflation has relented considerably after peaking in late 2015 and early 2016; the inflation rate is now projected to return to the target range in the coming months. With the increased uncertainty due to international turmoil, it is IHS Markit's view that interest rates are at an increased likelihood to decline. If the central bank is to adopt a monetary easing stance, it would likely only be a small adjustment downward (25 basis points).
In recent weeks we have seen the Peruvian currency continue to broadly strengthen in the face of many emerging-market currencies experiencing depreciation. Overall, our baseline call for high volatility remains in play, although we expect the exchange rate to stay below the peak levels of weakness in late February 2016. However, if commodity prices plunge again, the Peruvian currency will be likely to follow, especially if copper experiences any strong downward price movements.
Outlook and implications
The recent trends of very strong mining-sector output coupled with moderate growth in other areas of the economy have continued through the May data. Growth stemming from increased copper output will continue at least through early 2017, at which point the base-effect of higher growth in early 2016 will catch-up to subsequent months' growth rates. However, the expansions that are driving the increased output will continue providing a significant source of economic growth for Peru well into the medium term. Increasing international turmoil, mainly due to Brexit, will put downward pressure on our short-term outlook. 2016 will not see any dramatic changes, although we have reduced our GDP forecast for 2017 to 3.3%. Peru does not trade heavily with the United Kingdom (exports typically fall between 1.0% and 2.0% of the total), though exports to the broader European Union trading zone account for a larger chunk (15.0% to 16.0%). Our assumption on weakening EU growth rates will negatively affect the external demand for Peru's exports to that region, which thereby negatively affects our headline GDP growth outlook. Also, investment inflows will receive some negative impact, although we expect this to be slightly more muted. The biggest unknown is to what extent the Brexit situation spills over into a wider international disruption of economic activity. The Peru forecast is based on our current expectations for EU growth to decelerate significantly; however, if that expectation softens, and the effects of Brexit appear less grave, then our outlook for Peru will begin to look brighter. Overall, we are projecting GDP growth near 3.3% by year-end 2016.