Peru’s 6.5% Economic Growth Will Create 500,000 Jobs and Accelerate the Growth of the Middle Class
This article is the first of a seven-part series highlighting Latin American economic growth and the opportunities this offers to manufacturing and service companies exporting to the region.
Over the past 4 years, the country of Peru’s economy has quietly been growing at a pace ranging from 6 – 9% per year. The ever-increasing Asian demand for copper and gold has contributed significantly to 41 consecutive months of substantial GDP growth. Though current growth has slowed from the 2010 high of nearly 9% annual growth, as demand from India and China weaken, Peru still “remains among the fastest-growing economies in Latin America, with consumption and investment the key drivers,” Capital Economics, a consultancy, said in a recent note.
The Lima Chamber of Commerce (CCL) recently announced that a 6% annual economic growth rate could create up to 500,000 new jobs a year in Peru, according to a senior official. “The most important thing is to continue on the path of creating more adequate and better paid jobs,” said Cesar Peñaranda, the director of CCL’s Institute for Economy and Business Development. He further explained that due to the employment-output elasticity in Peru, demand for new workers at an annual economic growth rate of 4% would be approximately 1,000 jobs per day. This creates opportunities for those who want to join the labor market; it reduces unemployment and progressively moves the underemployed into better paying jobs. According to Peñaranda, growing at a rate of 6% would generate between 400,000 and 500,000 jobs annually in general.
As more Peruvians become members of the middle class, their purchasing power increases and they create demand for higher-quality products sourced from the USA and Europe. The increase in consumer spending has also been fueled by a stronger banking system which is approving increased number of loans and offering credit cards to financially-sound consumers.
These new consumers are responsible for a 20% annual growth rate experienced by members of the Association of Shopping Centers of Peru. Modern, huge shopping centers similar to Mega Plaza Express in a new Lima suburb are being constructed because of stronger consumer confidence and increased purchasing power. Only 20 years ago, this new suburb was a deserted, hilly expanse with a handful of factories and concrete-block shacks. Now there are DirecTV, Bata shoes and RadioShack stores, while sales associates desperately chase down potential customers offering everything from trinkets to cheap insurance, car loans and mortgages.
The banking sector is experiencing tremendous growth with Banco de Credito del Peru, the country’s largest bank planning to open nearly 100 new branches in 2013, offering enormous potential to companies supplying products to the banking industry. Though the banking penetration is currently only 30 percent, there is a proliferation of cash machines. Without a doubt, the banking industry could experience double-digit growth over the next 5 – 7 years.
“This is just what happens in any country when it starts to become more dynamic in terms of domestic demand by an emerging middle class that begins to consume more and more,” said Julio Velarde, Peru’s central banker. Leading analysts who follow Peru have dubbed the last four years of Peruvian growth as “spectacular.”
Many Peruvians have more cash in their pockets to spend. Ollanta Humala, Peru’s president, has pledged to cut the poverty rate to 15 percent before he leaves office in 2015 through social cash transfer schemes and an increase in minimum wages and pensions. Overall, wages have grown at an annual rate of between 6 and 7 percent in the past decade.
Though there are risks associated with a strong Peruvian currency, the Peruvian government is working diligently to keep things in check and maintain a strong growth trajectory. “The risk exists — it is there,” said Raal Salazar, chief economist at Macroconsult, a consultancy in Lima. “For now it is moderate, but we have to keep our eyes peeled.
David M. Talon, Managing Partner of iGrowth Strategies is a Global Business Strategy and Execution Specialist. He and the iGrowth Strategies Team have conducted over 250 distinct projects in 42 countries since the mid-1980. These projects focused on business expansion, two-way trade, strategic planning, competitive intelligence, sales strategy & training, market research, negotiation, strategic alliances, and product launch. Markets as diverse as India, Australia, Mexico, Turkey, Argentina, Brazil, France, the UK, Colombia, Peru, Chile and many more have been the focus of these projects.