According to the general manager of the Peruvian Institute of Economics (IPE) and director of the central bank (BCRP), the best news at the start of this year is that inflation is already very close to the target range.
Economic growth across the region was not the best in 2023 due to a mix of international impacts. In this context, the Peruvian economy fell 0.55% last year, but it is showing signs of improvement that can be consolidated, according to the IPE.
Last year's storm passed, the waters of the Peruvian economy have started to calm and there already are encouraging developments in the outset of this year, according to the report published in the Económika supplement of the Official Gazette El Peruano.
According to the general manager of the Peruvian Institute of Economics (IPE) and director of the central bank (BCR), Diego Macera, what the market expects for this and next year is a recovery of national production.
“By 2024, economic agents expect growth of approximately 2.5%, whereas the financial system foresees an expansion of the economy of 2%. For 2025 the projections are better, since agents predict growth of 2.8%, while the financial system foresees an expansion of 2.7%,” explained the economist.
However, Macera asserted that these indicators can even improve. “What we have now are probably the best expectations as of today. However, it is important to specify that there is an upward revision since the impact of El Niño phenomenon was initially considered to be even stronger," he stated.
Right or wrong?
But how good is it to grow at this figures? According to the economist, growth of 2% or 3% is important, obviously compared to -0.55% last year.
“For a more or less consolidated business, that is, a business on track that has secured its market share, it is possible to live with a 3% economic expansion. This business has opportunities to grow; furthermore, this figure (3%) masks, for example, some sectors that can grow more, be it 6%, 7% or 8%. Therefore, businesses that are already in the market generating profits will be able to maintain themselves if they play their cards in the best way,” said Macera.
However, he maintained that greater growth will be required to address other problems that plague the country, such as informality, generating a larger middle class, or closing circles of poverty.
“In these cases, it will be necessary to have a growth of 3.5% or more to meet these needs, being conservative,” he explained.
Mining underpinned the economy
There is no doubt that mining is the main engine for national production in Peru and its performance last year prevented a more drastic fall of the gross domestic product (GDP).
“If there is a way to qualify mining in 2023, it is that this sector was the 'breadwinner' (of the economy). If we do an analysis by economic sector, without mining the drop in GDP would have been much greater,” asserts Macera.
He comments that the performance of the mining sector is explained by the enduring, positive effects from Quellaveco copper mine, which started operations in 2022
“In addition, there was the normalization of some activities that were paralyzed in 2022 in regions such as Moquegua and Apurímac. Mining explains its contribution to last year's economic growth by almost an extra point, which means that if the fall was 0.55% without mining this contraction would have been around -1.5%," he said.
In relation to the rest of the productive sectors, the general manager of the IPE explained that the results were negative.
“Services, Manufacturing, Construction, Agriculture and employment suffered greatly, especially the agricultural sector. Precisely, the situation that agriculture went through had a negative impact on employment performance, since there was a strong contraction in payrolls. This is mainly a consequence of climatic events and also of the change that was made to the Agrarian Promotion Law in previous years,” asserts Macera.
Expectations
For many of the mass consumption sectors, the most important factor is that household purchasing power is recovering. This indicator is essential for businesses, since they count on it to plan their budgets, sales, profits and hiring of personnel.
“It is important for people to know if they can access various products and, in that regard, there is good news. Internationally, there has been a significant reduction in freight costs in recent months. This must have helped a little to recover sales margins,” comments the economist.
However, he points out that there is still some uncertainty about what may happen in the following months. “We have two active wars in the world, which could have some impact on freight costs. However, the level of products we import is much better than what we had two years ago.”
Regarding expectations related to employment performance, Macera said that they are not yet in positive territory.
“The effects of Covid-19 have not yet dissipated in this regard. Companies have maintained a low hiring expectation and this does not help the recovery of consumption capacity,” he says.
Climate phenomenon
However, Macera highlights that the probability that we will have a particularly strong El Niño phenomenon has declined.
“This means that we will not have an impact that causes considerable damage, like what we saw in previous years. To the extent that the probability of having a strong climate phenomenon decreases, expectations of a greater recovery rise,” he says.
The executive recalled that until October of last year, it was almost certain that we would have a very strong El Niño, but this forecast has been gradually decreasing and business and consumer expectations also improved in tandem.
In that sense, in this first part of the year, Macera maintained that Peru's economic situation is better and that the population feels this improvement, although a sense of prosperity is not felt yet.
“What is still seen is a sense of caution, both among companies and consumers. If El Niño passes without major complications or without having a great economic impact on social infrastructure, these expectations could improve; they have the potential to do so,” the economist pointed out.
For now, a better outlook is in sight for our economy, but to materialize so, the participation of everyone is required. “The ideal is that economic recovery involves everyone and we must aim for that,” he asserted.
Inflation in target range
For the general manager of the IPE and director of the BCRP, the best news to start the year is that inflation is already very close to the target range.
“A very important objective was achieved, since inflation is no longer a point of discussion in the debates or economic forums and that is very positive,” Macera stressed.
He expressed confidence that this situation can be maintained. “The expectation is to return to the target range and the good thing is that in the sector where prices had risen the most, which is food and energy, we are now seeing a very significant decline. Let us remember that these sectors are the ones that affect many homes the most, but it has already been almost controlled and a clear improvement is observed,” Macera revealed.
Regarding the exchange rate, the economist specified that it is not possible to predict its behavior or fluctuation. “The forces that influence the exchange rate have decreased in intensity in recent months. Furthermore, the probability that the United States Federal Reserve (FED) will continue to lower its reference interest rate in the coming months has decreased. This means that there will be a stronger dollar in the following months,” he said.
However, Macera explained that exchange rate movements in Peru have been quite low compared to the rest of the region.
“This generates important stability for economic agents. The lower the price of the US currency, the less the exchange rate in Peru will fluctuate. This is one of the country's great attributes to attract investment. Regardless of a free market, the exchange rate fluctuates little, something that other Latin American economies cannot boast,” said the economist.
