Global Insight Perspective

Significance

Domestic and external demand continued to be the main drivers of Uruguay's GDP expansion in the fourth quarter of 2006, while for the year as a whole, exports and manufacturing industries were the pillars of the country's stellar economic performance.

Implications

Although the third-quarter growth rate was somewhat slower than originally expected, the adjustment upwards on GDP figures for the first three quarters of 2006 made by Central Bank authorities brought annual growth to the 7.0% forecast by Global Insight in 2006.

Outlook

With the release of the fourth-quarter data, Global Insight is maintaining its full-year GDP growth projection of 5.9% in 2007 and 5.4% in 2008. Growth will be driven by the recent opening of new meat—mainly beef—markets abroad, leading Uruguay's exports.

Uruguay's GDP expanded by 6.3% year-on-year (y/y) in the fourth quarter of 2006, showing decelerating economic expansion from the previous two quarters as newly adjusted data were also released by Central Bank authorities. Nonetheless, when considering seasonally adjusted figures, GDP grew by 1.0% quarter-on-quarter during the October-December 2006 period. According to data published by the Central Bank of Uruguay (BCU), this brings GDP growth to 7.0% in 2006, up from the 6.6% registered in 2005.

GDP growth during 2006 continued to be influenced mainly by the surge in external demand for agricultural goods and industrial production. Real exports of goods and services jumped by 7.6% y/y, while imports were up by 16.0%, as domestic production has not been able to match consumer-demand expansion. Meanwhile, household demand ballooned in comparison with the previous-year growth rate, accelerating from 2.5% y/y in 2005 to 9.3% y/y in 2006. At the same time, growth in gross fixed capital formation also accelerated markedly, from 23.8% y/y in 2005 to 32.0% y/y in 2006, as machinery and equipment investments jumped 49.6% y/y in 2006.

By sector, GDP growth was driven by retail, lodging and hospitality (up by 8.4% y/y), the manufacturing industry (up 8.5% y/y), construction (up 14.0% y/y), and transport and communications (up by 12.0%) during 2006. The rise in retail sales drove the retail, lodging and hospitality component up, with sales of imported consumption and intermediate goods playing an important role; nonetheless, activity in the lodging and hospitality sector suffered a minor cut due to the drop in tourists' real average spending, which was not compensated by domestic demand for such services. The expansion in the construction sector decelerated when compared to the previous two quarters, since this sector's performance was heavily influenced by public-sector activity in the first months of 2006; indeed, the construction of the new electricity-generating facility by the state-owned electricity enterprise (UTE) drove up construction-sector activity in the first quarter of the year. Meanwhile, agricultural goods production rose by 8.3% y/y, driven by the rise in wheat, malt, soy, dairy and meat sales; the higher figures in the production of wheat were brought about by a combination of high international prices and favourable weather conditions. At the same time, higher demand from the manufacturing industries encouraged the production of malt and soy. The expansion in beef cattle slaughter (which marked a record high in 2006) remained strong as a result of high international prices, along with a strong demand for Uruguayan meat from abroad in 2006. Industrial manufacturing grew, motivated by external and growing domestic demand. The leading industries were food and beverages, the production of chemicals, and metal, machinery and equipment goods production .

Outlook and Implications

Sales to the external markets were the main drivers of the accumulated expansion in the industrial production index in 2006, up by 9.4% y/y. Private manufacturing activity had already recovered from the 2002 crisis—when it plunged by 16% y/y—expanding beyond statistical-rebound levels and easily surpassing the level of a pre-crisis projected yearly growth of 3.5%. This outstanding industrial output performance indicates that the economy retains considerable drive. In addition, the return to a single-digit unemployment rate should help to increase the markets’ (domestic and external) confidence in Uruguay's economic programme while giving a positive image boost to President Tabaré Vázquez's administration. The strong growth rate of Uruguay's economic activity in 2006 has translated into higher individual expectations about favourable job market conditions since the economically active rate expanded by 2.3 percentage points in 2006.

With the release of the fourth-quarter data, Global Insight is maintaining its full-year GDP growth projection of 5.9% in 2007 and 5.4% in 2008. Furthermore, the current environment of robust economic growth with subdued inflation is very positive, although we expect GDP growth rates to slow down towards trend levels in the medium term, mainly due to a higher comparison base and as the cattle/beef sector reaches full capacity. Nonetheless, longer-term growth will depend largely on the country’s ability to retain momentum and take advantage of trade agreements, especially in the meat production sector, and its capability to preserve markets and to seek new external markets for its high-quality beef.

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