Chile - Economic Briefing February 2003

Adjustment to Moderate Growth Expectations

Despite a pickup in economic growth towards the end of 2002, last year was disappointing for Chile, which is only slowly adjusting to more moderate growth expectations, following on a decade of rapid economic expansion. However, an adjustment seems inevitable, as government and private sector analysts are lowering their outlook for this year yet again. Despite new trade agreements signed with major economic regions of the world and an expansive monetary policy, the economy will only grow at moderate speed, constrained by a lack of global demand.

Economy proceeds favourably in November
In November, 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 slightly ahead of last month’s market expectations. The November growth rate was below the 2.4% expansion observed in October. However, in part, the November data were weaker due to seasonal factors, as the month counted one working day less compared to November 2001. According to seasonally adjusted data, the economy advanced 1.5% compared to the preceding month, following a much more moderate 0.13% increase in October.

December industrial production and unemployment blast expectations
Economic indicators reported for December have turned out substantially better than anticipated, raising hopes that the Chilean economy experienced a year-end boost, which could serve as a backdrop for improved growth prospects in 2003. In December, industrial production grew a healthy 7.2% compared to the same month last year, significantly above market expectations of 5.5%. In part, the reading was inflated by the fact that December 2002 counted one extra working day in comparison to December 2001, which adds about one percentage point to growth. Nevertheless, the December output growth represented the second highest reading in 2002 and was accompanied by strong industrial sales data. Owing to the robust December performance, industrial production increased 2.5% for the year as a whole, up from an anaemic 1.8% annual average growth in November. Employment also developed favourably towards the end of the year. The national unemployment rate dropped a full percentage point from 8.8% in November to 7.8% in the final month of the year. Seasonal factors mostly account for the drop in unemployment, as agricultural employment increased due to the planting and harvesting season and the number of construction jobs rose. Compared to the same month last year, unemployment only dropped a 0.1 percentage point, the same magnitude as observed in the three months prior to December. Nevertheless, the December rate came in better than market expectations, which anticipated a higher rate of 8.1%, amid the current sluggishness observed in most sectors of the economy. Finally, mining also experienced a year-end surge, which limited the slump experienced in the past year at a 3.2% decline.

Sluggish growth in 2002 amid sluggish external demand
Despite the year-end boost, the Chilean economy expanded only 1.9% in real terms in 2002, according to the latest Central Bank estimates, as published in the 15 January Monetary Policy Report. The estimate is in line with last month’s Consensus.

Government reduces growth forecast for 2003
For 2003, the Central Bank expects the pace of the economic expansion to pick up to between 3.0% and 4.0% compared to 3.5% to 4.5% expected in the September 2002 Monetary Policy Report. The main drivers behind the acceleration in economic growth are the anticipated improvement of the international setting and the current expansive stance on monetary policy. These two factors also constitute the major risk factors for the economy in 2003. A protracted military engagement of the United States in the Middle East could dampen the anticipated rebound in global demand, with a particular detrimental impact on commodity prices and the Chilean external sector, which depends largely on favourable copper prices. In addition, a potential weakening of the exchange rate could feed through to rising inflationary pressures, which would have to be countered by higher interest rates. The adjusted Central Bank estimate is in line with the current government projections. Only two months after the presentation of this year’s budget, on 22 January, the finance minister, Nicolás Eyzaguirre, reduced the growth forecast for 2003 from 4.0% expected previously to 3.5%. The Consensus shares the more cautious attitude towards the economic growth outlook adopted by the Central Bank and the government. On average, the panellists surveyed have reduced their expectations one notch over last month to the current 3.1%. For 2004, the Consensus forecast dropped 0.2 percentage points to 4.2%.