While Chile remains the fastest growing economy in the region this year, signs that the economy is cooling off are accumulating.  The Central Bank has acted aggressively and lowered interest rates for the fifth time this year to a 15-year low in order to revive the economy, while maintaining this year’s inflation target.  However, as a result of monetary loosening and concerns about Argentina, the Peso has plummeted to record lows, which may cause trouble for companies with large external debt loads.

Economic Briefing July 2001                                                                              Archive

March economic activity slightly below expectations.  In March, the monthly indicator for economic activity (IMACEC) increased at an annual rate of 2.4% over the same month in 2000.  The figure was well below the 3.7% growth reached in February and also slightly below market forecasts of 2.6%.  March market forecasts had been trimmed due to weak industrial production data released earlier and owing to one working day less compared to March 2000.  According to seasonally adjusted data, the economy remained flat over February.   

April economic activity below expectations.  In April, the monthly indicator for economic activity (IMACEC) increased at an annual rate of 2.6% over the same month in 2000.  While the figure was slightly above the 2.4% growth rate registered in March, it remained well below market forecasts of 3.5%.  Market forecasts for April had been optimistic due to relatively favourable April industrial production data.  According to seasonally adjusted data, the economy contracted 1.2% compared to March.  The Central Bank attributed the lower activity to a drop in imports and a weakening in the telecommunications industry, which so far had proven resistant to the downward trend observed in other sectors.

Industrial production in severe slump but recovery imminent.  The dreary April figures were followed by unfavourable data for May.  The National Statistical Institute (INE) reported that industrial production increased just 0.6% in May compared to the same month last year.  An 8.4% contraction in durable consumer goods production was the main driver behind the slump in industry.  On the positive side, capital goods production continued to register double-digit growth following the strong performance in April.  Nevertheless, the annual average growth rate dropped to a very modest 1.0% and panellists actually presage a weak second quarter, following the 1.5% decline in the first quarter.  However, the downturn in the first quarter is likely to have marked a bottoming out and in the third quarter the industrial sector should see a trend change, which should firm to a healthy growth rate in the fourth quarter. 

Unemployment increases strongly but growth should ease upward pressure.  According to INE, open unemployment reached 9.6% in the moving quarter up to May.  This represents a 0.5 percentage point increase over the previous moving quarter and confirms the upward trend observed since December 2000.  The Consensus sees unemployment increasing further but anticipates that the expected pick-up in economic activity towards the end of the year should subsequently help lower unemployment.

Growth forecasts pared again.  The weak data releases for the first two months of the second quarter do not bode well for the quarter as a whole.  In fact, panellists have revised their growth forecasts for the second quarter downward from last month.  The participating analysts maintain a more optimistic view for the second half this year.  The Consensus Forecast is just a notch below the Central Bank’s revised projections of 4.0%, down from the 4.3% published in its May Monetary Policy Report.  Jorge Rodriguez, the incoming Minister for the Economy, Energy and Mining, the replacement for José de Gregorio, who leaves to assume a director’s position at the Central Bank, already conceded that the government would have to re-evaluate its 4.5% growth forecast for the year. The Consensus Forecast for 2002 was also adjusted downward a 0.1 percentage point cut compared to last month. 

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