Chile - Economic Briefing May 2002

In the Starting Block

As the region’s most open economy, the Chilean economy stands to profit significantly from the anticipated pickup of global demand in the second half of the year. So far, however, the country remains in the starting block, as domestic impulses for an economic rebound are lacking. The Central Bank is doing its job and has cut interest for the fourth time this year in order to boost consumption and investment.

Weak February economic growth in line with expectations

In February, the monthly indicator for economic activity (IMACEC) increased by 1.4% compared to the same month last year.  The February performance represents a significant deterioration from the 2.9% growth registered in January but was precisely in line with Consensus Forecast expectations.  Consensus Forecast panellists had lowered their outlook for that month owing to weak data for industrial production.  According to seasonally adjusted data, the economy contracted by 0.1% over the preceding month and thus remained on the subdued track observed since December last year.

Dismal March data suggest weak first quarter

Data releases for March failed to inspire any confidence for a near-term recovery in the Chilean economy.  The development of unemployment, which remains one of the key impediments for higher growth, was particularly disappointing.  In the first quarter, the open unemployment rate rose to 8.8% from 8.3% reported for the moving quarter up to February.  The increase, in part, reflects seasonal patterns but year-on-year comparisons also show a marked deterioration.  In fact, the latest reading represents the first month with no improvement in unemployment since July last year.  Industrial production also deteriorated further, following the weak February performance.  In March, output declined at annual rate of 2.1%, following on positive growth in February.  The deterioration in industry was prompted by a drop in production of non-durable consumer goods, which shifted from healthy growth into negative territory (-4.4% year-on-year).  Meanwhile, the 18.0% contraction in durable consumer goods actually represents an improvement from even worse times in January and February.  Finally, capital goods actually expanded by 4.2%, following on a staggering 28.9% decline in February.  As a result of the weak March performance, industry growth in the first quarter remained restrained at a very disappointing 1.0%. 

Economic outlook remains stable despite weak first quarter

The development of the Chilean economy mainly hinges on the global economic activity.  However, the increased likelihood of a recovery on a global level -- since the beginning of the year the forecast for global economic growth this year has been raised by 0.8 percentage points – is not yet translating into increased optimism for Chile, despite the economy’s openness.  Over the past four months, the GDP growth forecast for this year has remained unchanged at 3.2%.  The reason for this surprising stability is the dismal development of the domestic economy in the first months this year, which has remained below expectations.  According to our panellists, economic growth in March should come in at 1.1%, which would leave first quarter GDP growth at 1.7%, unchanged from the weak fourth quarter last year.  Thus, the stability in the forecasts for the year as a whole indicates panellist optimism over accelerated economic growth towards the end of the year, given that activity is likely to remain subdued in the first half of the year, according to current indicators.  In fact, Consensus Forecast panellists believe Q4 2001 and Q1 2002 to have marked the bottom of the current globally induced slump.  In the second quarter, GDP growth is already seen to pick up and to increase further in the final quarter of the year.

Inflation drops in April providing the backdrop for …

In April, consumer prices rose by 0.37% compared to the preceding month.  The April figure marks the second consecutive month with notable price increases, following four months of price stability.  On an annual basis, the headline inflation rate nevertheless dropped from 2.6% in March to 2.5% in April.   Furthermore, the April price increase stayed below Consensus Forecast expectations of 0.45% and was prompted mostly by strong monthly increases in the housing, food and health categories, whereas price declines in clothing dampened the price expansion.  Given that surging fuel prices (up 5.8% on a monthly basis) were underlying the April price increase, the core inflation index, which excludes the volatile movements of fuel prices, dropped 0.02%.  Therefore, the annual core inflation rate -- the key indicator watched by the Central Bank – dropped from 3.3% in March to 3.1% in April and thus remained in the centre of the Bank’s inflation target range of 2 to 4% for this year.

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