World Bank hikes Peru's 2024 GDP growth forecast to 2.9%

The World Bank has revised its forecasts for Peru's GDP growth upward, raising its projection to 2.9% from 2.5% for this year and to 2.6% from 2.3% for 2025.

The forecast was made in the bank's Global Economic Prospects report and came despite its lower expectation for growth in the Latin American region, which it trimmed to 1.8% for 2024, down from the previous 2.3%.

The World Bank said that Peru's inflation is expected to continue falling as price pressures dissipate due to the decline in climatic anomalies caused by the El Niño phenomenon. That would allow the central bank (BCRP) to continue reducing its benchmark interest rate.

"This would allow further policy rate cuts, supporting private consumption in 2024 and 2025. Investment, however, is expected to recover only slowly from its fall in 2023, as political uncertainty weighs on business confidence," the bank stated.

With its upward revision to Peru's expected growth, the World Bank has brought its forecast back into line with local expectations and the predictions of the major financial institutions. Banco de Crédito (BCP), the largest bank in Peru, forecasts that GDP will rise 3.0% this year, a figure echoed by BCRP, with a slight upward bias.

ADVANCE

According to BCP, the latest available economic figures support the World Bank's upward revision and more positive results are expected for 2Q24. According to statistics bureau INEI, the monthly results for April included 158% year-on-year growth in the fishing sector, a 7.46% increase in domestic cement consumption, a proxy for private sector construction, after drops in February (-0.72%) and March (-7.00%).

The figures for the month also included a 5.41% year-on-year hike in the granting of mortgage loans and a 1.68% increase in consumer loans, while electricity generation was up 2.31% in April and 1.91% in May.

Although the mining sector dipped 4.5% year-on-year in April, BCP said that was due to the fact that lots of mining units carried out maintenance during the month. Nevertheless, high metal prices should bolster the industry.

"Although the price of copper is projected to moderate in 2024, increased mining production will support export growth," said the World Bank.

INTEREST RATE

In line with the improving economy, the local market expects the BCRP to cut the reference interest rate by 0.25 basis points in its next meeting, putting it at 5.50%.

Víctor Fuentes, public policy manager at economic think tank IPE, told BNamericas that, despite the preliminary improvements in indicators, the output gap – the difference between actual GDP and potential GDP – is still negative, so there is room to continue reducing the interest rate to reactivate the economy.

Although underlying inflation – which does not consider variations in food or energy prices – remains above the 3% target, Fuentes said that inflation adjustments have already been taken into account in monetary policy decisions, so the BCRP will continue with its expansive monetary stance.

The interest rate is expected to end the year at between 4.50% and 5.50%, according to the BCRP.