OECD Economic Outlook, Volume 2024 Issue 1

Peru

GDP will pick up to 2.3% in 2024 and 2.8% in 2025, supported by more favourable financial conditions and reduced inflation that will bolster domestic demand. Central government efforts to expand infrastructure, coupled with a faster execution of public investment projects by subnational governments, will support investment. A gradual employment recovery will stimulate private consumption. Exports are expected to be sustained by a rebound in tourism, fishing, and agricultural production as the impact of El Niño dissipates. Inflation will slow further, converging gradually to the midpoint of the target range of 2% by the end of 2024.

Monetary policy is expected to continue easing, as inflation and inflation expectations return to the target. The planned gradual reduction of the fiscal deficit over the next years, in compliance with the fiscal rules, should be implemented to maintain low public debt and safeguard the credibility of the robust fiscal framework. Enhancing spending efficiency and implementing a tax reform to boost public revenues are needed to address critical infrastructure and social needs.

Economic activity is gradually recovering

GDP contracted by 0.5% in 2023 due to social protests and the El Niño weather phenomenon which deducted around 2 percentage points from growth. Activity rebounded, by 2.2% at an annualised rate, in the fourth quarter (seasonally adjusted compared to the previous quarter) propelled by increased investment and higher government consumption linked to economic recovery and emergency initiatives related to El Niño. Business and consumer confidence are improving but remain weak. Short‑term indicators signal further recovery, as evidenced by a 1.2% monthly rise in economic activity in February, and continued dynamism in cement consumption and mining production.

Peru: Confidence and inflation indicators

1. Business confidence refers to the 3-month ahead of own sector expectations. For confidence indexes, values higher than 50 represent an optimistic view, whereas values lower than or equal to 50 represent a pessimistic view.

Source: Central Reserve Bank of Peru; INEI; and Apoyo Consultoría.

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Peru: Demand, output and prices

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Headline inflation has decreased and remains at the upper limit of the target range, with headline inflation at 3% in March after experiencing a slight uptick in February. Core inflation also experienced a slight uptick but has otherwise declined since March 2023, reflecting slowing inflation of both goods and services, with services displaying greater persistence. Wage increases have been limited, leading to real wages being 5% lower in December 2023 than in 2019. Inflation expectations have declined and are within the inflation target range set by the Central Bank. Risks stemming from global uncertainty and volatile financial conditions are mitigated by ample currency reserves and low public debt.

Adhering to fiscal rules is required to prevent public debt increases

Peru missed its fiscal target in 2023, with a budget deficit of 2.8% of GDP compared to the targeted deficit of 2.4% of GDP, due mainly to revenue shortfalls from the economic slowdown and higher‑than‑expected public spending related to El Niño. Achieving the 2% of GDP deficit target for 2024 poses challenges due to the authorities’ optimistic growth projections and various spending pressures. In March, the fiscal deficit of the non-financial public sector reached 3% of GDP, significantly deviating from the fiscal rule. Petroperú, the oil state-owned enterprise, could require further financial support, despite recent government efforts to expedite the firm's restructuring and improve corporate governance. Complying with the fiscal deficit target would enhance policy credibility and help stabilize the public debt-to-GDP ratio slightly below the 30% rule. The Central Bank began to cut policy rates in September 2023, reducing the rate by 175 basis points since then. In March, driven by the temporary inflation uptick, it kept the policy rate steady but reduced reserve requirements in domestic currency. Rate cuts resumed in April. The policy rate is expected to ease further to 3.75% in the first quarter of 2025 as headline inflation returns to target, and remain stable throughout the year.

GDP growth will rebound amid looming risks

Growth is projected to rebound in 2024 and strengthen in 2025, with declining inflation and improved financial condition, creating a more favourable environment for the continued recovery of consumer and business confidence. Public investment will be bolstered by the accelerated implementation of infrastructure projects. A gradual employment recovery, in line with economic activity, will also support private consumption. Exports are expected to benefit from improved performance in agriculture, fishing, and tourism, along with mining investments, raising economic dynamism. Inflation will converge to the 2% target by the end of 2024. However, there are significant domestic and external risks. A slower than anticipated recovery in China, Peru’s main trading partner, and lower copper prices would have a detrimental effect on exports, fiscal revenues, and investment prospects. Persistent political uncertainty and renewed flare-ups in social unrest remain key risks. Unpredictable, but frequent, climate hazards pose risks of economic setbacks and inflation spikes.

Fostering fiscal sustainability through efficient spending and tax reform

To maintain fiscal sustainability and address growing social and infrastructure needs, better spending efficiency and increased tax revenues are needed. Higher spending efficiency requires improvements in public procurement practices and enhancing subnational government capacities for project implementation. Measures to boost tax revenues include strengthening tax administration, reducing tax expenditures and updating the cadastre. Implementing a carbon tax can spur green energy adoption and incentivise investment in sustainable initiatives, fostering resilience and economic growth. Promoting labour and business formalisation through lower non-wage labour costs, skill-upgrading opportunities, simplified tax regimes for small firms, and robust enforcement of tax and labour laws can reduce inequalities and enhance productivity and tax revenues.