Strong expansion in July ...  In July, the monthly indicator for economic activity (IMACEC) increased at an annual rate of 8.1%, significantly up from the 4.8% growth rate registered in June and well above market expectations.  The positive development in economic activity was mainly driven by a higher output in the country’s hydroelectric power plants as the electricity sector continues to recover from last year’s draught-induced electricity shortages.  Transportation, which also exhibited strong growth, profited from the buoyant external sector (July exports: +30.1% year-over-year; imports: +35.8%) and the communications sector has been propelled by internet-related growth.  The July expansion was further assisted by healthy improvements in agriculture, fishing and mining.  Accounting for one workday less and comparing the result with July 1999, GDP would have increased at an even higher rate (by almost +1.0%, according to the Central Bank).

… contrasts with pessimistic sentiment ...  However, the healthy July reading contrasts sharply with the negative sentiment prevailing in the Chilean business community.  The reason behind the subdued sentiment is the uneven performance of the several sectors of the economy and the pending labour reform.  The current upswing is mostly driven by the country’s external sector whereas investment continues to lag and the recovery in consumption has exhibited unusual volatility with some stabilization only in the recent past.  Investment contracted in the second quarter and, according to more recent data released by the National Statistical Institute (INE), investment will remain subdued in the current quarter.  In August, capital goods production declined another 10.3% over the same month last year, worsening from July’s drop of 9.8%.  Consumer goods production remained in positive territory, driving the overall increase of 4.7% in industrial production, up from July’s 4.4% uptick.

… and fails to lower unemployment.  In the wake of the subdued sentiment, businesses continue to refrain from hiring.  In the moving quarter ranging from June to August 2000, unemployment increased to 10.6% from 10.2% the month before.  While the increase is in part due to seasonal factors, the government is likely to feel increased pressure to deliver on its electoral promises to bring down unemployment to pre-recession levels by year-end.  Unemployment remains one of the key reasons behind the slowdown in consumption growth over the past two months.  According to INE, real supermarket sales increased 7.3% in August, down from the 7.9% and 8.5% registered in July and June. 

Once the seasonal effects subside, unemployment should start declining again, helping to spur consumption.  Investment is also expected to pick up towards the end of the year as the buoyant external sector and stronger consumption should help to raise spirits in the business community.  Despite the somewhat gloomy atmosphere, this year should see a strong rebound of economic activity.  Compared to regional neighbours, Chile remains among the fastest growing economies, second only to Mexico.  Panellists have maintained their growth outlook for this year.  However, downward adjustments in global demand have prompted a reduction in next year’s forecast.

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