GDP growth is projected to be 3.1% in 2024, before moderating to 2.8% in 2025 and 2.6% in 2026. Growth will be driven by private consumption, supported by lower inflation, pension fund withdrawals, and a recovery in employment. While private investment is projected to recover moderately, ongoing political uncertainty may dampen its pace. Exports will benefit from sustained global demand, and inflation will remain near the central bank target of 2%. However, significant risks persist due to geopolitical and domestic policy uncertainties.

The central bank is expected to continue lowering the policy rate through early 2025 and then hold the rate steady. Fiscal policy has stimulated growth in 2024, with the deficit expected to exceed the fiscal rule target due to revenue shortfalls and increased spending. The government plans to reduce the deficit over 2025-26 to meet fiscal rules, though this will be challenging due to persistent spending pressures. To create the fiscal space needed for infrastructure and social investment, it will be essential to improve public spending efficiency and boost revenue generation.

After social unrest and climate-related disruptions in 2023, GDP rose by 3% year-on-year in the first three quarters of 2024, driven by public spending and investment and robust private consumption. Lower inflation and higher employment boosted private consumption. Increased infrastructure investment and a higher public sector wage bill contributed to higher public spending. Improved business confidence and gradual monetary easing supported private investment. The normalisation of weather conditions has benefited agriculture and fisheries, while high global prices for gold and copper have boosted mining.

Headline inflation declined and has hovered around the central bank's 2% target since May 2024, with one-year ahead inflation expectations remaining within the target range. Core inflation, while more persistent, fell to 2.5% in October, although service inflation remains stickier. Real wages are 5% lower than in 2019, as slack remains in the labour market despite recent improvements. Employment has surpassed 2023 levels, but unemployment has risen slightly due to higher labour force participation. Informality has declined modestly, but still accounts for more than 70% of employment, suggesting limited access to formal job opportunities. Ample currency reserves and low public debt provide resilience against potential shocks.

The projections assume an expansionary fiscal stance in 2024, with the government expected to exceed the fiscal target of 2.8% of GDP, due to revenue shortfalls and increased public spending. Fiscal consolidation is planned for 2025-2026, aiming to reduce the fiscal deficit to 2.2% of GDP in 2025 and 1.8% in 2026. However, achieving the 2025 deficit target will be challenging, as it requires significant spending cuts and the realisation of uncertain revenue from litigation recoveries. Additional fiscal pressures stem from an underfunded pension reform and potential financial support for Petroperú, the state-owned oil company. In the short term, reducing unnecessary tax expenditures and controlling recurrent spending ahead of the 2026 elections could strengthen policy credibility, support adherence to the fiscal rule and help stabilize public debt around the 30% target. The central bank has reduced policy rates by 275 basis points since 2023, with further cuts anticipated. Rates are assumed to decline to 4.5% by early 2025, after which they are expected to stabilise.

After a rebound to 3.1% in 2024, GDP growth will slow to 2.8% in 2025 and 2.6% in 2026. Political uncertainty could prevent the economy from reaching its full capacity while inflation is expected to stay around the 2% target. Private consumption will benefit from low inflation, a recovery in employment, and pension fund withdrawals approved in March. Improved business confidence will support private investment growth, but policy uncertainty will keep it subdued. Fiscal consolidation will constrain government consumption and public investment in 2025 and 2026. There are significant risks to this outlook. Political uncertainty may intensify in the lead-up to the 2026 general election, while rising insecurity and crime could hinder economic growth. Higher oil prices, driven by geopolitical conflicts, could lead to an increase in inflationary pressures. A slower recovery in China, Peru’s major trading partner, and weaker copper prices could hurt exports, government revenues, and investment. Additionally, frequent climate-related shocks pose risks of economic disruptions and inflation spikes.

To ensure fiscal sustainability and meet the growing demands for social and infrastructure development, higher efficiency of public spending and tax revenues are needed. Public spending efficiency can be enhanced by improving procurement processes and strengthening project implementation capacity, particularly at the subnational level. Increasing tax revenues will require improvements in tax administration as well as reducing tax evasion and tax exemptions. Reducing fossil fuel subsidies and implementing a carbon tax can encourage a shift to clean energy sources and attract investment in sustainable energy technologies, including low-emission transportation options. Strengthening governance and fostering political stability are also crucial for driving higher economic growth. A comprehensive strategy to promote formalisation - including reducing non-wage labour costs, simplifying tax schemes for small businesses, stronger legal enforcement and improving education and vocational training - would boost productivity and tax collection.