Signs of slowing domestic economic activity and a reduced global outlook prompted the Central Bank to trim its growth projections for this year.  Concerns about the slump in economic activity combined with the decision of the U.S. Federal Reserve Board to implement significant interest rate cuts in January, have provided the Chilean Central Bank with room to ease monetary policy, which should assist the recovery of investment and consumption.

Dismal economic performance at the end of 2000.  Even though expectations for economic activity in late 2000 were subdued, the data releases surprised on the downside.  In November, the monthly indicator for economic activity (IMACEC) increased by an annual rate of 4.6% compared to the same month in 1999, slightly below market expectations of 4.7% and well below the 5.8% expansion registered in October.  Activity seems to have deteriorated further in December.  Industrial production registered a steep decline of 3.8% in December year-over-year after a 0.8% contraction in November.  Both readings were partly affected by statistical effects.  The November contraction was in part the result of a higher comparison base in November 1999, when year-2000 related spending boosted industrial production, whereas the December contraction was affected by two working days less than in 1999.  The statistical effects notwithstanding, the dismal readings indicate a weakening of domestic demand and a marked slowdown in economic growth.  Consumer demand remained particularly stagnant at the end of the year.  Even though the National Statistical Institute (INE) reported an 8.0% annual increase in supermarket sales for December, the National Chamber of Commerce reported that retail sales rose at a lesser than expected 1.1% annual rate in December.   The sharp drop in unemployment rate was the only positive news.  In the moving quarter up to December 2000, unemployment dropped to 8.3%, 1.1 percentage points below the prior month and 0.6 percentage points below the same period in 1999.  However, even unemployment data was not entirely positive since the number of employed people actually dropped 0.4 percentage points over the same period 1999.

Gloomy sentiment despite high growth.  In the light of slowing growth towards the end of 2000, the Central Bank estimates that GDP grew 5.4% last year as opposed to a projected growth rate of 5.6% in September 2000.  Consensus Forecast panellists remain a notch more optimistic.  The official figure will be released on 23 March.  Whatever the final growth figure is, Chile is likely to have posted one of the highest growth rates in Latin America last year, second only to Mexico.  The pessimistic sentiment prevailing in Chile with regard to the economic recovery from the 1999 1.1% recession is in strong contrast with the high growth ranking in the region.  The discrepancy between public perception and actual performance is a result of the continued absence of a sustained recovery in domestic demand.  Even though domestic demand recovered at high rates in the first half 2000, growth ebbed towards the end of the year as the comparison base increased.  In fact, in absolute terms, demand has not yet returned to the 1999 levels. The only true recovery was observed in the external sector, where exports have again reached historic highs after the 1998/99 slump.

Central Bank less optimistic on growth.  The increased likelihood of a hard landing of the U.S. economy and its impact on global demand prompted the Central Bank to lower its growth forecast for this year to 5.6% from 5.7% and to reduce its outlook for 2002 from 6.3% to 5.9%.  The Consensus remains more cautious.  Panellists expect GDP to increase 5.3% this year and anticipate an acceleration to 5.7% in 2002.

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