Peru's central bank now sees the economy shrinking after a major forecast move

(Bloomberg) — Peru Central Bank President Julio Velarde said the country's gross domestic product will shrink this year, the first time a government official has publicly acknowledged the extent of the economic downturn.

The central bank said GDP will contract 0.5% in 2023, compared with September's forecast of 0.9% growth, the economy has now contracted for six months. Velarde lowered his 2023 inflation estimate to 3.1% from 3.8%.

Next year, the economy will expand by 3% and consumer price growth will slow to 2.3%, according to forecasts presented on Friday.

Peru's economy is suffering its worst recession in years, coinciding with a stretch of high inflation that has finally come under control. Policymakers have cut the key interest rate for four straight meetings, and analysts see more cuts on the horizon. The bank pointed to adverse weather for agriculture caused by El Nino, months of social unrest and weak private investment as major contributors to the fall in GDP this year.

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„The most important of them are climate factors,” Velard said. „They have hit exports, which have been our most dynamic sectors in the last few years.”

The bank forecasts that private consumption will increase by 0.2% this year, while private investment will fall by 7.3%.

Meanwhile, the central bank's inflation target will ease from 3% to 1% in the first months of 2024. Core inflation, without volatile prices, will do so this month.

„Inflation has clearly come down, but we can't declare victory yet,” Velarde said.

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