Peru’s GDP contracted 0.43% in the first quarter of the year: What factors are behind the fall?

Said impact and the probability of a negative quarterly result had already been anticipated by the president of the Central Reserve Bank, Julio Velarde. “We are expecting growth close to zero, it could even be negative, partly due to the protests that strongly affected January and also due to climatic factors that have affected March”he said last week.

For Teodoro Crisólogo, senior economist at the Peruvian Institute of Economy, the sectoral look at the first quarter shows that the Peruvian economy performs at two speeds. “On the one hand, the positive thing is that the primary sectors have grown above 8%. Basically supported by the good performance of mining. On the other hand, the non-primary sectors -linked to domestic demand and household spending- have accumulated four months in negative territory since December of last year”he asserted.

He explained that it is the sectors linked to investment that explain this low performance of the economy. Especially the Construction sector, which in March alone accumulated a fall of 12.42% and for the quarter the result is -11.48%. “[La caída del sector Construcción] It is not something recurring to see within the GDP series. Domestic cement consumption in the first quarter has been one of the worst seen for the economy since 1991″he explained.

building to the bottom

According to the INEI report, it is the construction sector that had the greatest negative impact on the quarterly result. Internally, the internal consumption of cement fell 15.36% and although the physical progress of works has a growth of 9.3%, this hides a decrease of 24.43% in the investment executed by Local Government.

For Guido Valdivia, executive director of the Peruvian Chamber of Construction (Capeco), the consecutive falls for the sector are a consequence of the lower confidence to invest that took place in 2022.

“Private investment has not been good since the last four months of 2022 and construction was supported by high growth in public investment. This strength was reduced. We already warned for a year about the impacts that the government of Pedro Castillo had on investment”

Guido Valdivia, Executive Director of the Peruvian Chamber of Construction (Capeco).

Another problem for this year, warned Valdivia, is the lower sale of homes in Modern Lima. “There is a strong drop in sales in Modern Lima of around 30% in the first quarter. A second problem is that we have S/300 million less for MiVivienda subsidies. If this is not resolved, the market will not respond”held.

Taking a longer-term view, Valdivia considered that the Construction sector does not have a recovery perspective for this year. “I don’t think the sector will grow, the ideal would be to try to make it decrease as little as possible. We know that mining investment is going to be below and this is not going to be corrected because there are no new projects. And if there was this year, they will just begin to build the next one. Something similar happens with the real estate market: projects are not born overnight”he added.

The Mining Drive

Only in March, mining reached a growth of 9.28% and as a result of the advance of metal mining activity. The increased production of copper, molybdenum, iron, gold and lead due to the contribution of Quellaveco, which began its production since September 2022, stood out.

Quellaveco also explained the favorable mining performance in the first quarter of the year, which registered a growth of 2.5%. “At the company level, in the metallic copper mining activity, the contribution of Anglo American Quellaveco and the accumulated volumes ascending in the production of the companies Southern Peru Copper Corporation, Minera Shouxin Peru, Marcobre, Minera Chinalco Peru, Cerro Verde, Gold Fields La Cima and Hudbay Peru; and in the case of iron production, Shougang Hierro Perú and Minera Shouxin Perú figured”reported the INEI.

Short and long term perspectives

Despite the fact that March was the first positive result for the year, it was below what was expected by the market consensus. This is what BBVA Research says. “Economic activity grew 0.2% year-on-year in March, negatively surprising market consensus, which anticipated a 1.3% expansion (Bloomberg)”read his analysis of March activity.

Thus, for April, the expected recovery is still moderate. This is what the leading indicators show. “On the one hand, an acceleration of electricity production and public investment was registered in April -in March it contracted -9.6% year-on-year, but in April it increased 12.1%-. On the other hand, the high-frequency indicators of private consumption spending and total investment still suggest weakness for the fourth month of the year.”said BBVA Research.

For Crisologo, the balance of the first quarter shows that despite the greater fiscal impulse (Plan Con Punche Peru) executed at the beginning of the year, this is not enough to offset the fall in private spending. “Despite all the fiscal effort, the fall in the private sector is much stronger and that is leading to a drop in domestic demand. In general, this deployment of greater spending is not materializing in a multiplier effect on private spending”he added.

Both BBVA Research and the IPE agree that 2023 still maintains a growth outlook of 1.9%, but with downside risks. “If a faster reactivation on the non-primary side of the economy does not materialize. The sectors linked to consumption, which should have rebounded in the first quarter, have not done so”Crisologo said.

BBVA Research adds other risks: “On the external side, interest rates will remain high and world growth will moderate. On the local side, inflation will continue at high levels for some time to come, the El Niño Phenomenon that is unfolding will probably have some impact on activity (mitigated by prevention efforts), and the risk of new outbreaks of protests will remain latent. . This scenario continues to be consistent with an expansion of activity in 2023 of around 1.9%”.