- Peru: We are raising our 2024 GDP growth forecast to 2.7% as El Niño fears subside
Rates markets were trading in a positive mood in Asia hours, extending on the tailwind of an unexpected reduction in planned Q1 UST borrowing announced yesterday, before surprisingly strong Spanish GDP and CPI lifted yields in early Europe dealing; Italian and Eurozone GDP data also outperformed projections. Asia equities were dragged by China’s Evergrande liquidation order, while European bourses caught up—and added—to Monday gains in the US on the Treasury’s announcement.
Aside from catch-up moves, the broader mood in markets looks somewhat mixed as US equity futures hold to a narrow band, major currencies trade mixed in small ranges vs the USD, and commodities are either flat (oil, copper) or down bad (iron ore on China mood). The MXN is modestly firmer, up 0.2%, trimming yesterday’s decline. USTs are extending yesterday’s bull flattening move, while EGBs and gilts are twist flattening, both weighed by the Eurozone data. The G10 day ahead has unreliable US JOLTS data at 10ET and a few ECB speakers to monitor.
Today’s Latam highlight—before the storm of BanRep, BCB, BCCh, and Fed decisions tomorrow—is Mexico’s Q4 GDP release at 7ET. Chilean unemployment data due at 7ET should not materially shift expectations for tomorrow’s decision. Brazilian December and 2023 fiscal accounts are out at 12.30ET, being closely monitored for risks to FinMin Haddad’s balanced deficit goal. We’re also keeping an eye on Petroperu news after FinMin Contreras said yesterday that the government will announce measures to support the oil SOE on Friday or early next week. Authorities are also considering a temporary closure of Machu Picchu amid protests against plans to hire a third party to manage the sales of entries on line.
Our latest Mexico forecasts anticipate an above-consensus 3.4% y/y rise in output in Q4-23 (median at 3.0%). This would be roughly equal to the 3.3% y/y pace recorded in Q3, to bring 2023 annual growth to a very strong 3.4%. This would represent about a full percentage point outperformance over US GDP growth of 2.5% (preliminary). Mexico has reaped the benefits of strong income growth in the US via remittances with the added support of the government’s construction spending binge on AMLO’s hallmark infrastructure projects. On a related note, at 10.30ET, Hacienda (FinMin) will publish its Q4 report on public finances and debt.
Public works and social programs spending will likely continue at a strong pace in coming months ahead of the June presidential elections, perhaps picking up if Sheinbaum’s lead in polls narrows further. An El Financiero poll published yesterday showed that Morena’s representative’s lead over the PRI/PAN/PRD candidate Galvez to 48% vs 32%, down from 52% to 30% last month—with some supporters shifting to the MC’s defined candidate Alvarez Maynez and some shifting from Sheinbaum to Galvez.
—Juan Manuel Herrera
PERU: WE ARE RAISING OUR 2024 GDP GROWTH FORECAST TO 2.7% AS EL NIÑO FEARS SUBSIDE
We are raising our GDP growth forecast for 2024 from 2.3% to 2.7%. The reasons are threefold. First and foremost, the risk of a strong El Niño event in early 2024 has subsided from highly likely to nearly negligible. Secondly, the base comparison has become even more favourable as growth in 2023 has turned out weaker than initially forecast, as a result of which we have mildly lowered our growth forecast for 2023 from -0.2% to -0.5%. Finally, the world economy appears geared to perform mildly better than feared.
The latest reports from Peru’s El Niño monitoring entity, ENFEN, indicates that El Niño has weakened significantly off the coast of Peru. The likelihood that El Niño will be weak or nonexistent now stands at 68%, while the likelihood of a strong El Niño has declined to insignificant currently, from over 50% three months ago.
Our new assumption of a weak Niño in lieu of a strong one will have its greatest impact on fishing and agriculture. In 2023 El Niño (which is a two-year event, namely 2023–2024) had a strong impact on fishing. Thus, a more normal fishing year in 2024 should translate into strong growth off a very low base. However, given how fishy fishing GDP can be in terms of risks, we are forecasting a rather mild 16.7% growth for the sector in 2024. There is upside to this figure.
Fishing also contributes to industrial processing through fishmeal production, which, together with the impact of the new Talara oil refinery, should result in robust industrial processing GDP growth in 2024, which we estimate at 7.3%.
We are a bit more cautious regarding agriculture (which includes livestock) growth, which we forecast at 2.4% in 2024. Although normal weather in 2024 will be a constructive factor, the impact of El Niño in 2023 will continue to be felt in 2024, as worried farmers and agro industries have planted less acreage than is normal. This will impact the first half of the year, mainly, with normality reasserting itself slowly during the second half.
The outperformer in 2023 was mining, growing an estimated 8%, thanks to the coming on stream of the huge Quellaveco copper mine. This source of growth has played itself out, however, and we expect much more moderate mining GDP growth of around 2.5% in 2024. Surprisingly, there was much less disruption due to social conflicts in mining during 2023 than in previous years. We can only hope for another quiet year in 2024.
Throughout 2023, one of our main concerns was the underperformance of those sectors linked to domestic demand, in particular industrial manufacturing. Much of this underperformance was linked to the eroding impact of inflation on real wages. In 2024 we expect inflation to be much more subdued, so real wages should hold their own and consumption should perform better. It’s not easy to tell just how much better, however. We expect industrial manufacturing growth of 2.8% (excluding raw material processing), although this will mostly be a rebound from a dismal 2023.
Construction should perform a bit better, our forecast is 3.7% growth, after an 8% estimated decline in 2023. Once again, construction growth in 2024 will mostly reflect a partial rebound from a dismal performance in 2023. We do see some upside however, if business confidence improves and at least some of the government infrastructure initiatives prosper if new or accelerate if ongoing.
Will the stars align enough to ensure even greater growth in 2024? The main star that is missing is greater political stability and business confidence. It’s hard to see that improving before the elections in 2026.
—Guillermo Arbe & Pablo Nano
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