Chile - Economic Briefing April 2002

Waiting for a Global Rebound

The increased optimism over a rebound of the global economy that is currently evolving comes at a welcome moment. The Chilean economy is expanding at very moderate rates compared to the strong growth rates observed in the past decade and any government attempts to kickstart the domestic side of the economy have so far led nowhere. Thus, the export-oriented country eagerly awaits a global rebound to provide the much needed impetus to the domestic economy.

2001 marks slowest growth in decade apart from 1999 recession

In its calculation of the 2001 national accounts, the Central Bank switched the base year from 1986 to 1996. According to the new base year figures, gross domestic product (GDP) expanded by 2.8% in 2001. In addition, growth rates for prior years were revised substantially, mostly to the downside (see chart). With the exception of the recession in 1999, 2001 marks the year with the lowest economic expansion registered in the past decade. The dismal performance sank in over the course of 2001, as the year started with healthy growth rates above 3%, weakening to 2.7% in the third quarter followed by a much weaker final quarter, as year-on-year growth slowed to just 1.7%.

 

Weaker domestic demand key for bleak growth
The dismal 2001 performance was mainly due to the domestic side of the economy, whereas the external sector provided for some upside momentum. Accordingly, domestic demand dropped 0.7%, amid weak private consumption (+1.4%) and a substantial contraction in inventories. Gross fixed investment (GFI) also turned out weak compared to the healthy growth in the prior year, as businesses were increasingly reluctant to invest in machinery and equipment. GFI expanded 2.0% in 2001 but with a very pronounced deterioration over the course of the year, starting at 8.4% growth in the first quarter 2001 and subsequently dropping to a year-on-year contraction of 6.2% in the final quarter. Exports expanded by 9.7% in 2001, despite a significant deterioration in the country’s terms of trade, driven by lower copper prices - the country’s main commodity. Imports, on the other hand, declined by 1.3%, as a robust first quarter was followed by a constant weakening over the course of the year, culminating in a 8.9% year-on-year contraction in the final quarter 2001.

Manufacturing industry declined amid lower external demand and reduction of inventories
On a sectoral basis, the fishing sector led growth in 2001 with a 2.2% expansion. Rather than the result of favourable climatic conditions, the strong performance reflects the success of the Chilean fish farms, which accounted for the lion share of past year’s growth. Fishing was followed by a 7.3% expansion in electricity, gas and water output, owing to strong growth of the hydroelectric power plants in the first half of the year thanks to abundant rainfall. Transport and communications also expanded a healthy 5.9%, as strong growth of mobile phones and long distance calls compensated for a slump in aerial transports towards the end of the year in the wake of the September terrorist attacks in the United States. On the low end of sectoral performance was the manufacturing industry, which experienced a 0.3% decline in 2001. Manufacturing was the only sector which experienced a contraction last year but as the most important sector also dragged down the overall performance of the economy. The sector suffered from slumping external demand, in particular for capital goods and durable consumer goods and from the reduction of inventories, which businesses had accumulated throughout 2000.

 

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