Politics Takes to the Streets
Recent political developments have proven challenging for the Kuczynski administration. Though its relations with Congress calmed in August, a real commitment to working on an even minimal common reform agenda seems lacking. There’s general impression of a weak government unable to administer routine matters, let alone important crises like the recent health workers strike, and a major and more damaging national teacher strike that resulted in a nationwide six-week suspension of classes.
The teachers’ strike was ostensibly over issues of compensation, and the government’s rules for teacher evaluation procedures. But it also had political overtones. The strike was called off after 75 days, as public support for the government waned. The government yielded to most of the teachers’ financial demands, but managed to hold its ground in retaining evaluation procedures the unions wanted abolished (under current rules, a teacher who fails to pass an evaluation on the third attempt is sacked).
The long strike took a major toll on the government’s popularity ratings. President Pedro Pablo Kuczynski’s approval rating plunged more than 10 percentage points over the last month, to just around 20%, the lowest level of his term. In a widely criticized statement, Kuczynski downplayed these results as unjustified and lacking in credibility; he seems to be counting on expected economic recovery to soothe the public malaise.
GDP growth in June, at 3.6%, was higher than expected, driven by better performance in primary activities, especially in agriculture. Non-primary activities also started to show some growth. All indicators point to a rebound in some non-primary activities, especially in construction, influenced by higher public investment and some signs of a private investment recovery. But other indicators, linked to consumer confidence and employment, fail to suggest a prompt consumption recovery.
The government’s 2.8% 2017 growth target would require a 4% Q4 growth rate we deem unlikely. More likely the Q4 rate will be 3% or slightly higher, yielding 2.6% growth for the year.
Higher-than-expected monthly inflation in August raised the 12-month rate to 3.2%, above the 3% upper boundary of the Central Bank’s target band. This was explained by the climb of some food prices in the wake of El Niño, and by utility rate hikes. We maintain our yearend 12-month forecast of 2.5%, and a return to the Bank’s target range by October. We also see the Bank cutting its policy rate again, but could postponed its decision to October.
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