Chile - Economic Briefing June 2002

Inflation Reaches Historic Lows

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.

Economic performance disappoints to the downside in March

In March, the Chilean economy expanded a meagre 0.4% compared to the same month last year. The March reading for the monthly economic activity indicator (IMACEC) marks yet another decline following on the already weak 1.3% growth registered in February. While part of the weak growth can be explained by seasonal factors -- since Easter was in March this year two working days less were registered than last year -- the March reading was nevertheless well below the Consensus, which expected a 1.1% expansion. As a result of the below-expectations March reading, first quarter growth of gross domestic product (GDP) also disappointed to the downside, coming in at 1.5% year-on-year compared to 1.7% expected by the Consensus.

First quarter growth below expectation amid weaker external sector but domestic side of the economy improves

The disappointing economic performance in the first quarter follows on an equally weak annual growth rate of 1.7% registered in the fourth quarter of 2001. The slight deterioration in economic growth observed in the first quarter is entirely attributable to a worse performance of the external sector amid further weakening of the global economy, which prompted export growth to slow from 12.5% year-on-year in the fourth quarter to 6.0% in the first quarter of this year. The domestic side of the economy improved over the preceding quarter but still remained in negative territory. Domestic demand declined 2.5% yoy (Q4: -4.9%). The improvement was carried by gross fixed investment, which declined at a lesser 2.0% compared to the 6.2% contraction in the fourth quarter. Consumption and the change in inventories, which are reported as one item by the Chilean Central Bank, also dropped at a lower pace than in the fourth quarter (Q1: -2.6% yoy; Q4: -4.5%).

Fishing leads growth, manufacturing improves but remains weak

On a sectoral basis, the fishing sector led growth with a staggering 15.4% expansion. Rather than the effect of favourite climatic conditions, the strong growth is the result of the country’s successful fish farm industry, which has boosted the sector’s performance. The energy sector came in second in terms of growth, expanding by 4.5% on an annual basis, as positive developments in hydroelectric power plants compensated for the decline in thermal power plant output. The manufacturing industry, the country’s largest sector, expanded by just 0.4%. However, while meagre, the first quarter represents an improvement over the preceding quarter, when manufacturing industry activity declined at an annual rate of 0.5%.

Mining contracts for the first time in almost a decade

Mining marked the bottom end of sectoral performance. In fact, it was the only sector that reported a decline in output compared to the first quarter last year. Moreover, while the contraction was small in scope (-0.5% yoy), it is the first time that the sector declined since 1993. The contraction was mainly due to lower output in private and public sector copper mining activity, as mine operators cut production in the light of lower commodity prices. In the past, lower copper prices were compensated for by higher output leading to almost a decade of uninterrupted quarterly growth in mining. In the meantime, the copper price has recovered over the low reached in November last year, which could provide for positive growth in the second quarter.

First quarter should have marked trough as April data suggest that recovery is underway
Higher copper prices and an improved global setting indicate that the first quarter marked the trough in the current economic slump. In its recent report on monetary policy, the Central Bank states that it expects the economy to expand by 2.3% in the second quarter, which is precisely in line with this month’s Consensus. Preliminary data for economic activity support a more upbeat outlook. In April, industrial production advanced a strong 6.6% over the same month last year. While this reading is partially inflated by an extra work day, it nevertheless represents the best performance since May 2000. Unemployment remained unchanged at 8.8%, as the government resumed some of the job creation programmes.

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