Chile - Economic Briefing December 2002

Global Concerns Continue to Weigh on Outlook

The assessment of Chile’s near-term economic future is seen increasingly negative, as the global outlook continues to be revised downward. As the region’s most open economy, the country’s fortunes depend largely on the developments in the global economy and a lack of global demand typically affects the country twofold, via lower export volumes and by exerting downward pressure on commodity prices.

September growth in line with expectations
In September, the monthly indicator for economic activity (IMACEC, Indicator Mensual de Actividad Económica) expanded by 2.1% compared to the same month last year and was thus precisely in line with last month’s expectations. The annual growth rate registered in September was ahead of a 1.5% expansion observed in August. However, the September data were inflated by seasonal factors, as September this year counted two extra working days compared to the September 2001. According to seasonally adjusted data, the economy actually contracted 0.45% compared to the preceding month after 1.53% growth in August.

Economic dynamism shifting away from external sector in the third quarter
With the September result in line with expectations, third quarter growth of 1.8% over the same period last year did not come as a surprise. The reading is just a notch ahead of 1.7% growth registered in the second quarter, which is also the rate of expansion of the first three quarters combined. However, despite this similarity in overall economic growth, economic dynamism shifted substantially within the economy. The external sector, which constituted the main engine behind economic growth in the second quarter slowed substantially in the third quarter and economic dynamism was mostly concentrated in the domestic side of the economy.

Domestic demand picks up considerably amid buoyant consumption but investment slumps
Domestic demand expanded by 2.6% compared to the third quarter last year and was thus much stronger than in the second quarter, when domestic demand actually dropped by 0.4% year-on-year. The improvement in domestic demand is remarkable since investment activity deteriorated. In fact, gross fixed investment was not only below the meagre 1.5% growth registered in the second quarter but also declined by 1.2% over the same period last year. The rest of domestic demand (consumption including inventories), on the other hand, expanded at a healthy 3.8% pace and was, thus, well ahead of the 1.0% contraction registered in the second quarter. Exports experienced by far the largest deterioration compared to the second quarter, when the 8.6% annual growth constituted the fastest growth rate among the major GDP components. In the third quarter, exports of goods and services dropped by 2.1% over the same quarter last year, despite a favourable development in non-copper exports. According to trade balance data, copper exports, which accounted for 34.1% of total exports, fell 15.0% over the third quarter 2001 and thus offset the strong growth in industrial exports (+8.1% yoy).

Mining declines amid production cutbacks but droop offset by strong manufacturing
The slump in copper exports is also visible when looking at a sectoral breakdown of GDP. Mining declined 6.3% over the third quarter last year, following on a more moderate 3.0% contraction in the second quarter, and thus constituted the weakest sector of the Chilean economy. In fact, apart from a moderate 0.3% decline in construction, mining constituted the only sector with negative growth in the third quarter. The decline in mining was due to production cutbacks at state-owned mining company Codelco, the world's largest copper producer, whereas copper prices actually picked up 3.0% over the same period last year, according to data from the London Metal Exchange. Apart from mining and construction, all other sectors experienced healthy growth. Industrial manufacturing constituted the fastest growing sector, adding 5.5% over Q3 2001 following on meagre 1.5% growth in the second quarter. According to the Central Bank, intermediate goods registered the strongest growth within the sector, in particular the category of printing and editorials. Commerce, restaurants and hotels also registered a notable improvement over performance in previous quarters, adding 2.2% on an annual basis. The improvement is mostly due to higher sales of industrial goods. The other sectors developed mostly along the lines observed in the second quarter (details see chart). With third quarter growth in line with expectations and only one more quarter to go, 2002 forecasts were only lowered one tenth of a percentage point since last month to 1.9%. The outlook for 2003 dropped 0.2 percentage points since last month to 3.1%, as participants appear to expect a less favourable development in the external sector amid a subdued global setting.



 

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