El Niño set to stymie Peru's recovering growth in 2023-24

Peru is once again forecast to grow less than originally expected both this year and next thanks to climatic phenomena. 

Although the country has ridden out the worst of the political crisis after the removal of former president Pedro Castillo and his replacement with Dina Boluarte, managing to unlock various projects and get economic activity back on track in the meantime, that progress looks set to be cut short by the start of a new global El Niño phenomenon. 

El Niño causes a range of effects in Peru, often leading to intense and sometimes catastrophic rains and flooding in the north, with drought in parts of the central Andean highlands. This will undermine economic activity, while infrastructure will also probably be damaged with accompanying financial losses.

The country is already facing the consequences of unusual climatic events, with production ministry Produce recently postponing the start of the anchovy fishing season in north and central Peru, stating that “there are no biological conditions for the development of extractive activities.” 

That will have a serious impact on Peru's important fishmeal and fish oil exports, reducing the annual production volume by around a third. Peru currently supplies 20% of global demand for these products.  

Economic growth estimates for 2023, which range between 1.9% and 2.0%, will probably be revised downward again. Although preventive measures are being taken to avoid further damage, with a state of emergency being declared in 18 regions for 60 days, that may have a counterproductive effect due to the high degree of informality in the Peruvian economy.

If the global Niño does indeed coincide with the coastal El Niño phenomenon, which raises sea temperatures, the climatic impacts could be moderate and/or high for the first quarter of 2024.

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According to consultancy Macroconsult, the last time there was a powerful El Niño phenomenon in Peru, in 2017, the economic losses amounted to US$3.1bn. 

"The last phenomenon caused the economy to grow 1.5 percentage points below what was expected," Luis Miguel Castilla, former head of the economy and finance ministry, told local radio station Exitosa. 

Given that El Niño has already been confirmed to have started, with the effects growing stronger towards the end of the year, the impacts will be seen in the figures for the second half of 2023 and first half of 2024.

Castilla said that growth estimates for 2023 would have to be revised downward again. “In general, all forecasts have been conditioned. In the absence of a climatic phenomenon, or one that is quite mild, the government forecast growth of 2.5% for this year. Now with these events – including declaring regions with high levels of informal labor in a state of emergency, much lower growth is expected.” 

Fernando Gonzales, a senior economist at economic research center IPE, told BNamericas that the economy's outlook had already been weakened by the slow pace of construction and private consumption, but the situation now is even more complicated. 

“We recently made a downward revision to our [annual GDP growth] projection from 1.9% to 1.7%. If you add the risk of the phenomenon to that, it could certainly reduce our growth further. We're starting from a fairly low rate by the standards we had before the pandemic,” he said.

Meanwhile, Hugo Perea, chief economist for BBVA Research for Peru, says that the latest anomalies in the Pacific and the accompanying climate risks will have an effect on the new forecasts that will be published on June 21. 

“It's likely that we'll have to adjust them given that, when we looked at the reports of the committee in charge of the El Niño phenomenon studies in March, the probability of a new phenomenon was low, or even that it was going to be diluted,” Perea told BNamericas. 

BBVA currently estimates that Peru's GDP will grow 1.9% in 2023 and 3.0% in 2024, but these figures will be adjusted this month.