Arcaya & Asociados
Economic Intelligence Unit
August 17th 2007
Venezuela’s economy expanded by 8.9% year on year in the second quarter, the weakest pace of expansion in more than two years. This compared with an upwardly revised 9.1% GDP growth in the first quarter. The external sector continued to be a drag on growth as exports dropped by 5.7%, the sixth consecutive quarter of decline. At the same time, imports surged by 32.9%, albeit slowing from the 43.3% jump in the first quarter. Private consumption growth remained strong, at 18.8%, similar to the 19% expansion in the first quarter. Growth in gross fixed capital formation remained rapid, but eased to 27%--a one-year low. Inventories continued to build ata fast pace.
THE EIU VIEW
The upward revision to growth in the first quarter, combined with a slightly higher pace of growth than expected in the second quarter, means the Economist Intelligence Unit is likely to raise its 2007 GDP growth forecast from 6% to near 6.5%. This implies a slowdown in the second half of this year, owing to a high base of comparison, a worsening policy environment and a stabilisation of fiscal revenue. The stimulus from fiscal expenditure— which was stepped up sharply in the second half of 2006 ahead of the December presidential election—is continuing, boosted by the additional stimulus of a sharp cut in the VAT rate and another large nominal minimumwage hike. But in the second half of the year, it will become harder for the government to maintain an expansionary fiscal stance in the face of weakening fiscal revenue. At the same time, real wage growth will turn negative and unemployment will rise as the business environment becomes more difficult. Private consumption growth should decelerate, although direct government subsidies, exchange controls (which channel consumption into the purchase of fixed assets) and high inflation (which promotes consumption over savings) should provide something of a floor.
As the extraordinary fiscal stimulus of recent years is gradually withdrawn, gross fixed investment growth will slow more markedly. Until now, this has been sustained by easy access to commercial bank credit and by the consumer spending boom, providing stimulus to a variety of non-oil sectors such as construction, communications, finance and retail. But private investment in the non-oil sector is increasingly unlikely to thrive in light of threats to property and contract rights, and in particular the threat of nationalisation and expropriation of assets as the drive towards state-led development progresses. The external sector will eventually become less of a drag on growth as export volumes recover (assuming some recovery in oil output), and as the pace of import growth slows in line with domestic demand. GDP growth is forecast to average 4% in 2008.
Venezuela: GDP (% change, year on year)
Source: Central Bank of Venezuela