Chile - Economic Briefing January 2002

Opposition Gains as Support for Government Wanes

In the December elections, the right-wing opposition party Independent Democratic Union (UDI, Unión Demócrata Independiente) emerged as the true winner, confirming the strengthening trend observed in past elections. In order to revive popular support for his centre-left coalition President Ricardo Lagos reshuffled his cabinet. With unemployment at the focus of the electorate, this year is unlikely to make Lagos’ task easier as the economic outlook continues to deteriorate.

October economic activity in line with expectations

In October, the monthly indicator for economic activity (IMACEC) was up by 2.9% over the same month in 2000, half a percentage point above the 2.4% expansion registered in September.  The October reading was in line with market expectations, as strong industrial sales data released earlier had indicated an uptick in economic growth.  Nevertheless, the October result was partially inflated by an extra working day compared to October 2000, which typically accounts for 0.5 to 1.0% in additional growth.  According to seasonally adjusted data, economic activity declined 0.6% over the prior month, down from the 1.1% expansion in September. 

Unemployment drops strongly in November but industry surprises on the downside

Data releases for November provided ambiguous signs about the course of the economy in the final two months of the year.  On the one hand, unemployment came in considerably better than expected by the market.  National open unemployment dropped from 9.7% in the moving quarter up to October to 8.9% in November, compared to 9.2% expected by the Consensus Forecast panellists.  The reduction in unemployment can be explained by increased government efforts to absorb jobless in the secondary labour market and seasonal hiring in the agricultural sector.  However, the decline in unemployment is unlikely to continue for long as the effect of seasonal factors subsides.  In fact, panellists see unemployment increasing in March after bottoming out  in February. 

Outlook for economic growth lowered again

On the other hand, industrial production and sales data surprised to the downside.  Industrial output growth picked up from 1.5% in October to 2.3% in November but remained below expectations.  Moreover, the National Statistical Institute (INE) reports that industrial sales data plummeted from the strong double-digit growth registered in October to 4.4%.  As a result, panellists expect just 1.8% economic growth in November.  While December growth is still seen at a more robust annual 3.7% rate, the forecast for growth in 2001 was revised downward 0.2 percentage points to 3.1%.  The outlook for this year remains highly uncertain as reflected in the broad spectrum of forecasts, which range from 2.5% at the lower end to 4.7% at the upper end of the spectrum.  Pessimists argue that the subdued global environment will contain demand for Chilean manufactures.  In addition, commodity prices are seen to remain under pressure and thus keep mining sector growth in check.  Optimists, on the other hand, believe that a strong global economic rebound in the second half of 2002 will boost for the country’s external sector and commodity prices strongly.  The Consensus growth figure dropped a 0.1 percentage point since last month and is now in line with the recently revised government projections.

Consumer prices fall in December – annual inflation continues dropping

In December, consumer prices dropped 0.3% over the previous month, the fourth deflationary bout observed this year.  The price declines affected most sectors monitored by INE and excluded only the health and the education/recreation sectors, which experienced increases of 0.1% and 0.4% respectively.  The broad based price decline reflects sluggish consumer demand and may presage somewhat weaker economic activity in December than expected.  Because of the unexpected price decline, annual headline inflation dropped from 3.1% in November to 2.6% in December.  The core inflation index, which excludes fuels as well as fresh fruits and vegetables, remained unchanged in December.  As a result, annual core inflation dropped 0.5 percentage points from 3.7% in November to 3.2% in December.  Panellists continue to factor the more benign inflationary environment into their forecasts and have lowered their estimates for year-end headline inflation by 0.3 percentage points, as subdued domestic demand should assist the Central Bank in keeping inflation in check in 2002. 

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