GDP Rises 6.1% in Q2.  On 23 August, the Central Bank announced that the Gross Domestic Product (GDP) increased by 6.1% in the second quarter over the same quarter last year.  The second quarter reading fell just short of the August LatinFocus Consensus Forecast, which foresaw a GDP expansion of 6.2%.  When combining the second quarter result with first quarter growth of 5.5%, GDP expanded by 5.8% in the first half this year.  The acceleration in economic growth comes despite a continued slump in investment and is mainly driven by consumption and a healthy external sector.

Electricity recovers from last year’s draught while construction remains depressed.  The second quarter data shows that agriculture and fishing grew by 4.0% and 5.2% respectively, compared to the same period the year before.  The important mining industry, which accounts for some 11% of GDP, continued along the weak growth trajectory observed in the first quarter, growing by only 2.9%, since some mines, which have exhausted their capacities in the reporting period, have not yet been replaced with new production facilities.  The manufacturing industry grew 5.9% in Q2, slower than in the first quarter (+8.1%) because of a reduction in seafood processing amid adverse fishing conditions.  The electricity, gas and water sector exhibited the strongest growth (+27.4%) as abundant rainfalls supplied the hydroelectric power plants with water supplies needed to recuperate from last year’s draught-induced electricity shortages.  Meanwhile, the construction industry has not yet recovered from last year’s 10.0% recession.  While infrastructure works showed some improvement, housing construction remained subdued, which provided for the lion's share of the 1.5% contraction in the construction industry during the second quarter.  The second quarter decline followed on the heals of a 2.8% drop in the first quarter. 

Buoyant communications drive services.  The services sector expanded by 5.6%, led by the transport and communications sector, which increased 12.1% over Q2 1999.  Sluggish performance of transportation was more than compensated by a strong performance of the communications sub-sector, which profited from healthy growth in internet services, as a more competitive environment brought down internet access prices.  The sub-sectors retail, hotels and restaurants and financial services both dropped from first quarter growth levels to 5.1% (Q1: 5.7%) and 5.4% (Q1: 5.6%) respectively.  

Exports propel growth, investment remains sluggish.  Simultaneously, Banco Central de Chile released supply and demand data.  According to the figures, domestic demand experienced a quickening in its growth rate, expanding 11.9% in the second quarter, up from 6.2% in the first quarter.  Thus, in the first half of this year, domestic demand was up 9.0%.  The healthy Q2 domestic demand growth is entirely due to a strong recuperation in consumption, whereas investment remains depressed.  Gross fixed capital formation contracted another 1.3% in the second quarter, following a 5.3% contraction in Q1.  As a result, investment was down 3.3% in the first six months of the year compared with the same period last year.  The protracted recovery in investment activity has raised some concerns over the sustainability of the growth trajectory expected earlier this year.  Therefore, panellists have revised their forecasts downward.

Unemployment rises further.  The main reason behind the sluggish recovery in investment is a lack of business confidence in the government’s plans for economic reform, the pending labour reform being chief among them.  Furthermore, the high unemployment rate – in the moving quarter from May through July the open unemployment rate increased to 10.2% from 9.4% the month before – is delaying a more pronounced recovery in consumption.  The erratic movements in retail sales, which plummeted from 12.6% year-over-year expansion in April to a modest 2.1% growth rate in May, only to recover to a healthy 8.5% growth rate in June and then fall again to 7.9% in July, provide further reason for the cautious attitude exhibited by the business community. 

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