Can Peru avoid taking sides in the U.S.-China trade war? Economy to outperform in 2024; BCRP to pause in December
In this report, we discuss three topics. First, we analyze the impact on Peru of the developing trade war between China and the United States. Second, we discuss Peru’s better-than-expected economic growth (we have revised up our full-year 2024 real GDP growth forecast to 3.1%, but have lowered our 2025 forecast to 2.8%). Finally, we discuss Banco Central de la Reserva del Perú (BCRP) policy. We expect the Board to pause in December, and to make fewer cuts next year.
Peru between November 10th and 16th hosted, for the third time, the Asian Pacific Economic Cooperation (APEC) intergovernmental forum, with most of the 21 heads of member states gathering in Lima to discuss future cooperation. Chinese President Xi Jinping took the opportunity to inaugurate Peru’s Chancay megaport, located about 46 miles north of Lima. China’s state-owned Costco Shipping built the megaport, and it is owned jointly by Costco and Peru’s Volcan mining company. The Peruvian authorities consider China’s investment in the megaport, which coincided with the opening of eight additional Pacific-facing ports, a great opportunity for Peru to become an integral link in international supply chains, boosting long-term economic growth.
However, the re-election of Donald Trump to the U.S. presidency in early November has complicated Peru’s relationship with China. As a small open economy, Peru takes a multilateral approach to foreign relations and, since the 1990s, has benefited from the resulting greater trade integration. Given the escalating trade war between the two superpowers, the key question for Peru is whether it can avoid taking sides, and maintain strong trade ties with both countries.
Though we have revised up our 2024 full-year real GDP growth forecast to 3.1% from 2.8%, we have lowered our 2025 forecast to 2.8% from 3%. For 2026-2027, we have also lowered our forecast slightly, to 3% from 3.1%. As expected, the economy has proven resilient in Q3 2024 and, while we continue to expect a deceleration in Q4 2024, high-frequency indicators suggest a better performance than previously expected. However, this year’s growth was mainly explained by one-off positive shocks, whose effects we expect to fade gradually during 2025, with long-term factors such as the inauguration of the new ports becoming more influential.
Surprising most market commentators, the BCRP’s board at its November 7th meeting decided to cut its policy rate by 25 basis points, to 5%. We nonetheless continue to maintain our year-end projection of a 5% rate, implying a pause in December.
As in our previous report, we continue to see short-term upward risks of inflation. Moreover, the incoming Trump administration’s expected increase of import tariffs introduces a new long-term upward risk to global inflation. Because the real rate—the nominal policy rate adjusted for 12-month-forward inflation expectations—of 2.55% in November is close to the BCRP’s estimate of the neutral rate for 2023, of around 2%, we have raised our BCRP policy rate forecast for year-end 2025 to 4.5%, from 4%.
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