Chile - Economic Briefing February 2002

Waiting for Global Recovery

The prospects for the Chilean economy this year depend largely on the development of the global economy and commodity prices, given the country’s strong dependency on its external sector and copper in particular. On the domestic side, the Central Bank has paved the way for stronger growth by lowering interest rates, which should help boost consumption and investment.

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. 

November economic activity somewhat below expectations

In November, the monthly indicator for economic activity (IMACEC) was up by 1.5% over the same month in 2000.  The November reading came in somewhat below market expectations of 1.8% growth and also substantially lower than the 2.9% growth registered in October 2001.  The dismal November performance was mainly due to weaker industrial sales, which dropped from double digit growth rates in October to just 4.4% (National Statistical Institute (INE) data).  According to seasonally adjusted data, economic activity declined 0.1% over the prior month, which actually marks an improvement from the 0.6% contraction registered in October.  Thus, in the first eleven months of the year, the economy increased 3.1% over the same period in 2000. 

Unemployment drops again strongly in December …

In December, the Chilean economy continued to send ambiguous signs about the possible growth trajectory in the coming months.  On the one hand, unemployment came in considerably better than expected by the market.  National open unemployment dropped from 8.9% in the moving quarter up to November to 7.9% in December.  The December figure was considerably better than the 8.4% expected by Consensus Forecast panellists for that period and continues the rapid downward trend observed since October 2001, when unemployment reached a temporary peak at 10.1%.  Seasonal hiring in the agricultural sector but also increased government efforts to absorb jobless in the secondary labour market help explain the reduction in unemployment.  However, the decline in unemployment is unlikely to persist as the effect of seasonal factors subsides. 

… but industry plummets

On the other hand, industrial production and sales data surprised to the downside.  Industrial output plummeted from 2.3% growth in November to an annual decline of 1.9% in November, the first contraction registered in industrial manufacturing since March 2001 and substantially below expectations.  For the whole year, industrial production expanded by just 0.8% with a very mixed performance among the different categories.  The durable consumer goods group was the worst performing sub-sector, registering a 2.9% contraction, whereas the capital goods group was the best performing sector in 2001 (+15.5%).  It should be noted, however, that the strong capital goods output was based on a very weak comparison of three consecutive years of contraction. 

In addition, the National Statistical Institute (INE) reports that industrial sales data continued to drop from double-digit growth registered in October and a much weaker 4.4% in November to barely positive growth (+0.4% year-on year) in December.  Consequently, panellists have lowered their expectations for economic growth in December from a robust 3.7% rate expected last month to just 2.5%.  The anticipated final result for growth in 2001 was also revised downward 0.1 percentage point to 3.0%. 

Development of global economy to determine growth prospects

The outlook for 2002 remains highly uncertain as reflected in the broad spectrum of forecasts.  The Central Bank now expects 3.3% growth in 2002, which is down from 5.0% announced late last year.  Key to this year’s growth prospects are developments in the global economy.  If the global economy recovers in the second half this year as many analysts believe, the export-dependent Chilean economy would rebound strongly driven by increased demand for Chilean manufactures.  In addition, commodity prices will play an important role in the economic performance this year.  A pickup in global demand would provide upside pressure on commodity prices, in particular copper, which accounts for the bulk of Chilean exports.  Amid the lingering uncertainty over the development of the global economy, the Consensus growth figure dropped 0.2 percentage points since last month.

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