Economic growth firmly established.  In March, GDP, as measured by the monthly indicator for economic activity (IMACEC), expanded 6.4% compared with the same month last year.  This is the seventh consecutive monthly increase and so far the pace of economic recovery continues to accelerate owing to weak comparison levels in 1999.  First quarter GDP expanded 5.5% with respect to the same period last year, the second consecutive quarter of economic recovery and in line with Consensus Forecast projections.  While Q4 growth was driven mainly by the external sector, the Q1 2000 expansion was more level.  Domestic demand grew 5.4% compared with the same period last year, the first expansion since end 1998.  However, gross fixed capital formation decreased 4.2% as private investment lagged behind somewhat owing to political uncertainties related to the presidential elections.  Consumption expanded 8.8%, compensating for the slack in fixed capital formation.  In addition, the recovery in domestic demand prompted strong growth in consumer good imports and industrial production, in particular of durable consumer goods and construction materials. 

Construction fails to recover.  On a sectoral level, electricity, gas and water registered the highest growth rate over Q1 1999 (+16.3%), since last year’s drought provided for a weak comparison base.  Transport and communications also displayed strong growth at 8.3%, followed by the manufacturing industry, which increased 8.2%.  The only sector that suffered a setback was the construction industry, which contracted 2.7% compared to the first quarter the year before.  Services also profited from rebounding consumer demand, with retail, restaurants and hotels adding 5.9% and financial services 5.1%.

Industrial expansion moderating.  More recent data indicate that the recovery of investment is not yet fully under way.  According to the National Statistical Institute (INE), industrial production increased 2.9% in April compared to the same month the year before.  Since January, when industrial production growth reached a temporary high of 10.9% year-over-year, industrial activity has consistently lost its dynamism.  The reason behind the slower pick-up of industrial production is slack investment.  In fact, capital goods production contracted 26.6% compared to April 1999.  Key reasons for less favourable investment recuperation, include higher long-term interest rates, excess installed capacity and an anticipated contraction in public investment.  Further, some companies may be waiting until the new government unveils the details of some of the planned economic reforms, most importantly the labour reform bill, which is currently being reviewed.  Non-durable consumer goods and intermediate consumer goods showed a deceleration and only durable consumer goods displayed improved growth rates over March.

Unemployment remains high but retail sales surge.  The slow recovery of investment and a lack of dynamism in industry are preventing a quick recovery of unemployment, which seems stuck above the 8% threshold.  In April, the moving quarterly average increased for the third consecutive month, reaching 8.5%.  Retail sales, on the other hand, appeared unaffected by the low employment levels, growing 12.6% year-over-year.

The Central Bank expects GDP to expand by 5.9% in 2000 and 6.2% in 2001 (6.2% in the coming 8 quarters).  Panellists remain confident about the recovery in Chile and have revised their forecasts a notch upwards to 6.1% from 6.0% last month.  However, owing to a slower than expected resumption investment activity and less optimistic scenario for the global economy in 2001, the Consensus now expects GDP to expand at 6.2% in the next year, down from 6.5% two months ago.

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