Peru Economic Outlook. December 2023

The economy will contract 0,4% in 2023, negatively affected by successive shocks. The impact of most of these shocks (except for El Niño) will vanish in 2024 and economic activity will grow again (2,0%). The recovery will be completed in 2025, with output growing around 3,5%.

Key points

• Key points:
• World output growth will continue to slow down due to tight monetary conditions, less expansionary fiscal policies, moderation in labor markets, and less excess savings. In this way, after growing 3,4% in 2022, global economic activity is expected to increase by 3,0% in both 2023 and 2024, improving after that with output growth reaching 3,3%.
• On the fiscal front, we expect a deficit equivalent to 3,0% of GDP in both 2023 and 2024. After that, when the negative shocks that have been affecting economic activity finally vanish, the fiscal deficit will fall, approaching 2,0%. These forecasts imply gross public debt below a level equivalent to 35% of GDP in 2023 and 2024, slowly trending upwards and coming closer to 37% in 2028.
• The Peruvian currency will show some weakness onwards as the central bank moves faster with monetary policy flexibilisation than the Fed (reducing the incentive to hold assets in local currency), bounded by the low deficit in the current account of the balance of payments. We expect the USDPEN to end this year in a range between 3,75 and 3,85 soles per dollar and the next one between 3,85 and 3,95.
• Inflation will keep trending down in the coming months due to the high year-on-year comparison base, the reversal of some supply shocks, and a weak economic activity. It is expected to end this year around 3,5% (with a downward bias) and the next one at 2,8%.
• Amid the rapid decline of inflation and a weak output growth, the Central Bank has been cutting its policy rate, although cautiously. The data-dependent mode will likely be maintained in the coming months. Our base scenario is that the policy rate will end this year at 6,75%, rate cuts resuming when El Niño weather phenomenon has vanished and ending 2024 at 5,0%.

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