Chile - Economic Briefing December  2001

Outlook Subdued Despite Copper Price Recovery

With the exception of Mexico, no other economy in the region is exposed as much to the global softening, due to its openness, as Chile.  Thus, the country’s outlook remains subdued even though global cuts in copper output have provided some upward movement in copper prices, the country’s main export commodity.  Meanwhile, the government maintains a lid on spending and is concentrating the economic stimulus on the monetary side.  However, the monetary focus bears the risk that inflation will overshoot the official target.

Economic growth surprises to the downside in September

In September, the monthly indicator for economic activity (IMACEC) was up by 2.4% over the same month in 2000, following a 2.8% expansion in August.  The September reading was well below market expectations, as industrial production and agricultural output came in surprisingly weak.  In addition, the electricity sector, which has shown strong growth in the past months, is beginning to feel the impact of a higher comparison base owing to higher output in the same month last year.  According to seasonally adjusted data, economic activity rose 1.2% over the prior month, up from the 0.3% expansion in August. 

Further slowdown in the third quarter

Owing to the weak September reading, third quarter GDP growth also remained below market expectations at 2.6% compared to the same period last year, down from 3.5% annual growth registered in the second quarter.  Thus, the expansion in the first nine months of this year reached 3.3%, according to the Central Bank.  Growth in the external sector remained the key driver behind the expansion, despite the global softening, since the domestic side of the economy remained weak.  

However, the dynamism in the external sector is waning quickly and lower export growth (+ 6.5% year-on-year following 12.8% in the second quarter) is the main reason for growth deceleration over the previous quarter.  Domestic demand contracted by 0.8% over the third quarter 2000, which actually represents an improvement compared to the 2.8% contraction in the second quarter.  Gross domestic investment expanded 3.3%, unchanged from the second quarter.  The Central Bank does not publish quarterly figures for consumption, however, additional information provided by the Central Bank suggests that consumption has picked up from the weak second quarter with the bulk of deterioration in the rest of domestic demand concentrated in the change of inventories.

Slowdown affects all sectors and sends industry into contraction

The lower dynamism observed in the third quarter spread through almost all sectors but was most pronounced in the manufacturing industry, which turned from meagre growth in the second quarter into negative territory and thus was the only sector which registered negative annual growth.  Production destined to foreign markets still exhibited positive growth but is likely to fall in the short term as demand for Chilean manufactures is likely to decline amid the deteriorating global environment.  

Despite the strong decline in copper prices, mining continued to grow and actually picked up pace compared to the second quarter.  The improvement is entirely due to higher output at the state-owned copper mines of Codelco, the world’s largest copper producer, whereas private mines remained at last year’s production levels.  The electricity, gas and water sector continued to grow strongly but far below the double-digit growth rate in the second quarter, since the recovery effect from the 1999 drought in the hydroelectric power plants is finally drawing to an end. 

The service sector also lost dynamism.  Growth in commerce dropped to 2.6% in the third quarter, as weak industrial and automobile sales were compensated only by more favourable developments of retail sales.  Transport and communications did surprisingly well.  While growth in air transport activity dropped sharply in September, following the strong growth observed in previous periods, maritime transport activity remained strong.  Furthermore, communications also maintained high growth, particularly in the mobile phone segment, albeit at a lower level than in the second quarter.

October data indicate continuation of economic slump

Indicators released for October suggest that growth will remain sluggish throughout the remainder of the year.  Annual industrial production rose by 1.5%, up from 0.1% in September, while unemployment dropped from 10.1% in the moving quarter up to September to 9.7% in October.  However, most of the improvement in unemployment is concentrated in the agricultural sector and can be attributed to seasonal factors. 

In addition, the government employment generation programme continues to distort the actual figures; without the latter, labour market unemployment would hover around 12%.  Nevertheless, growth in the fourth quarter is expected to reach 3.3%, according to Consensus Forecast panellists.  The disappointing third quarter reading has prompted panellists to revise their 2001 forecast downward by 0.2 percentage points since last month.  The outlook for next year plunged.

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