MercoPress. South Atlantic News Agency

Uruguay private consumption expanding several points higher than GDP

Deputy Minister Andres Masoller concerned with expansion rate of consumer credit

The Uruguayan economy expanded 2.3% in January-March over the previous quarter, which has elevated forecasts for the twelve months of 2011 to a floor of 6.5%. However the Uruguayan government is concerned that consumption again expanded at a higher rate than GDP.

“The first quarter expanded at a faster rate than previous quarters, but there is concern with the strong dynamism of private consumption” which jumped 9.3% compared to the first quarter of 2010 and 6.8% for the economy, said Deputy Economy minister Andres Masoller.

“This could lead to macroeconomic misbalances in the medium term” added Masaoller who nevertheless said authorities were confident that with a strict fiscal policy “inflationary pressures can be contained”.

Masoller also anticipated a very austere budget for the coming fiscal year “zero outlays increase” except for an additional 80 million USD for education, to which “must be added the Central Bank monetary policy efforts”

“Higher interest rates and an increase in banks’ reserves should have effect in the coming months, slowing credit expansion and thus inflation pressures”.

The central bank Monetary Policy Committee is scheduled to meet next week and a hike in the basic rate in anticipated.

Masoller said that the government expects a “moderate deceleration” in coming quarters and the latest data is in line with what was planned, which is the economy will expand 6% in 2011.

During the first quarter manufacturing and retailing increased the rate of expansion while construction and primary sector activities moderated.

Retail, restaurants and hotels in the first quarter expanded 14.9% boosted by car and home appliances sales and the tourist season.

Transport, storage and communications followed with a 13.7% increase. Mobile phones cargo and private transport were significant items. Other activities that include real estate agencies, financial services, government services and leisure expanded 5.1%.

Manufacturing in the first quarter expanded 3.9%; construction 7.2% and primary activities, 4.2%, while the only sector that fell back was the supply of electricity, gas and water mainly because of a long drought period meant less power generated by the hydroelectric dams.

Finally and in spite of Masoller’s optimism private consultants estimate the Uruguayan economy will expand above the government target (6%) to a floor of 6.5% if international conditions remain.

“But this means we can expect a tightening of monetary policy to become more evident”, said Florencia Carriquiry from Deloitte.

Ramon Pampin from PwC estimates that consumer demand has become a “hard core” because of the high employment rate, job availability and sustained salary increases and thus “it’s hard to see the economy expanding below 6.5%”.