Chile - Economic Briefing October 2002

Global Concerns, Brazilian Spill-over and Oil Price Weigh on Outlook

As the region’s most open economy, Chile’s fortunes depend on the developments of the global economy. Consequently, Chile’s economic outlook has experienced greater scrutiny than any other Latin American country, as it becomes increasingly evident that hopes of a global economic rebound in the second half of this year is unlikely to materialise. In addition, the country suffers from contagion from political uncertainty in Brazil and may have to cope with higher oil prices in the coming year.

July economic activity in line with expectations
In July, the monthly indicator for economic activity (IMACEC, Indicator Mensual de Actividad Económica) expanded by 2.1% compared to the same month last year. The reading was well ahead of sluggish growth observed in May and June and also slightly exceeded market expectations of 2.0%. The market had anticipated more favourable year-on-year growth numbers, following on previously released upbeat data for industrial production and unemployment for that month (for details see last month’s edition). However, the healthy July performance was partially inflated by seasonal factors since the month counted two extra working days compared to July 2001. According to seasonally adjusted data, the economy actually contracted 0.4% compared to the preceding month.

Unemployment rises again driven by seasonal factors
Encouraging signs from July employment, which had raised hopes for an uptick in economic growth, were squashed by August data. The National Statistical Institute (INE) reported that unemployment rose again to 9.6% in the moving quarter to August, up 0.2 percentage points from July. This brought unemployment back into the seasonal upward trend, which had been defied by the favourable July reading. Unemployment will most likely peak in September and should subsequently drop amid seasonal hiring to reach 9.3% by the end of the year.

Industrial production drops in August
Industrial production also returned to negative growth rates after a brief upward surge registered in July. In August, industrial output declined by 1.0% compared to the same month last year. Industrial sales recorded an even stronger 1.6% decline. The deterioration in industrial output was mainly due to a 21.9% contraction in the consumer durables production. Capital goods output dropped even more, down 27.0% over the same month last year. With non-durable consumer goods also in negative territory, only intermediate consumer goods managed to expand on an annual basis (+2.4% yoy), buffering overall output from a more pronounced decline.

Outlook for next year seen more pessimistically as global economy may suffer from Iraq conflict
Given the discouraging picture, panellists expect the overall economy to expand a meagre 1.4% in August and 2.3% in September. Accordingly, economic growth in the third quarter is anticipated to reach just 1.9% but to accelerate in the final quarter. For the year as a whole, GDP growth is seen more pessimistally and the forecast was lowered a notch since last month. Panellists have also lowered their forecasts for next year’s economic expansion significantly. The downgrade is motivated by renewed pessimism about the global recovery and market scepticism is exacerbated by an increased likelihood that oil prices will remain high, particularly as uncertainties regarding a potential conflict between the United States and Iraq persist. As an oil-importing country, Chile would be among the hardest hit economies in the region at a moment when subdued global growth limits the upside potential for commodity prices, in particular copper.

Consumer prices surge in September but annual inflation remains contained
In September, consumer prices increased by 0.84%. The September reading was above the 0.38% spike registered in August and exceeded market expectations of 0.2%. The main driver behind the September price hike were higher food prices and, to a lesser extent higher transport and housing prices. In particular, prices for fresh fruits and vegetables shot upwards by a staggering monthly rate of 11.5%. Fuels also experienced a strong 3.5% surge amid rising oil prices. The core inflation index, which excludes these more volatile items advanced at a much more moderate 0.32%. Despite the strong surge in consumer prices, annual headline inflation rose only 0.1 percentage point from 2.2% in August to 2.3% in September. The annual core inflation rate even dropped 0.2 percentage points to 2.0% from 2.2% in August. Even so, Consensus Forecast panellists have hiked their year-end inflation forecasts since last month by 0.3 percentage points. In the coming year, panellists see inflation to remain at these levels.



 

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