Chile - Economic Briefing August 2002

Government and Central Bank Act in Unison to Stimulate Growth

Weak domestic demand is stifling the country’s growth prospects, despite an improving outlook for the external sector. In particular, the persistently high unemployment rate is forestalling a more robust upturn in private consumption. The Central Bank has cut interest rates yet again and the government has announced a package of fiscal measures to provide incentives for foreign investment and stimulate growth.

Economic performance disappoints in May

In May, Chilean output, as measured by the monthly indicator for economic activity (IMACEC, Indicator Mensual de Actividad Económica), expanded by 0.9% and thus remained below the 1.3% expected by last month’s Consensus and also well below the April reading of 3.9% growth. In part, the dismal result was due to a working day less compared to May 2001, which accounts for between one half of a percentage point to a full percentage point of growth. Seasonally adjusted data show that the economy added 0.1% over the preceding month in May. According to the Central Bank, economic growth in the first five months this year has reached 1.9% compared to the same period last year. The dismal growth rate – by Chilean standards – is due to a slowdown in industrial activity and in mining as well as a deceleration in transport and communications output.

Industry slumps, unemployment spikes but hopeful signs are coming from the external sector

Preliminary data for June do not augur well for a significant improvement over May. Unemployment spiked from 9.1% in the moving quarter up to May to 9.5% and industrial production declined 2.0% over the same month last year. While the latter actually represents an improvement after the very disappointing May reading (-3.8% year-on-year), the figure dashes hopes that the country’s industrial sector will pull clear from its persistent sluggishness in the near future. Subdued confidence is responsible for the current performance of Chile’s industry. The stubbornly high unemployment rate has kept consumer confidence under pressure, as evidenced by an 8.8% annual contraction in durable consumer goods output in June. Similarly, the 6.4% drop in capital goods production indicates that the business community has not yet recuperated previous confidence levels. With domestic demand subdued, the external sector is currently providing some room for hope. In June, exports increased 9.5% compared to June last year, whereas imports contracted by 4.9% over the same time frame. The strong increase in exports – the first in one year – was mainly propelled by a 22.1% increase in copper exports in spite of only moderately higher prices. The decline in imports is due to lower capital goods imports, which were compensated for by higher imports of consumer goods.

Weakness from sluggish domestic demand outweighs stronger external sector

With sluggish domestic demand and a strong external sector practically balancing each other out, Consensus Forecast panellists expect the economy to expand just 0.8% in June, which would leave second quarter growth at 1.8%. A second quarter growth rate below 2% is certainly disappointing when compared to the more optimistic sentiment at the beginning of the year. However, a second quarter reading of this order also implies that the Chilean economy bottomed out in the first quarter, when growth reached the lowest point in the current business cycle with a 1.5% annual expansion in economic activity. In the third quarter, the economy is anticipated to grow at a quicker pace, gaining further speed in the final quarter of the year. Stronger second half growth should lift the annual economic growth rate. The pick-up towards the end of the year is also seen as providing a solid backdrop for growth in 2003. According to this month’s forecast, the cyclical recovery will continue in 2003.

July price spike prompts surge in annual headline inflation but core inflation remains under control

In July, consumer prices increased 0.44%, twice the rate anticipated by the Consensus. A spike in fuel prices and a concomitant increase in transportation costs was the main driver behind the July price increase In addition, food prices experienced a significant boost amid higher fresh fruit and vegetable prices . The upward trend in prices was partially compensated for by lower clothing, household equipment and health prices. As a result of the July price increase, the annual headline inflation rate shot up from 2.0% in June to 2.6% in July. However, since the majority of the price increases was concentrated in fuels, fresh fruits and vegetables, core inflation, which excludes these volatile items, remained well behaved. In July, the core inflation index increased by just 0.12%. As a consequence, the annual core inflation rate continued the downward trend observed since February and dropped from 2.7% in June to 2.5% in July.


 

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