Chile - Economic Briefing April 2003

Economy Develops Favourably Despite Scandals

The country is being rocked by scandals, which have triggered the resignation of the Central Bank president. Meanwhile, the domestic economy is showing promising signs at the beginning of the year. However, a substantial rebound depends on the resilience of the global economy. Without increased demand for Chilean goods and strong copper prices, the country is unlikely to reach its potential growth rate this year.

Economic growth in 2002 slightly ahead of latest estimates
On 26 March, the Central Bank published fourth quarter national accounts data. According to the release, the economy expanded 3.2% in the fourth quarter compared to the same period the year before. Growth for the full year was 2.1% and thus a notch ahead of last month’s expectations, which were based on preliminary December data for economic performance. At the same occasion, the Central Bank announced changes to historic gross domestic product (GDP) data, most notably an upward revision of 2001 GDP growth from 2.8% to 3.1%.

Growth in final quarter driven by external sector
The fourth quarter continues the series of continuous improvements in economic growth, following on 1.3%, 1.7% and 2.4% annual growth rates registered in the first three quarters of 2002 respectively (Note: Quarterly numbers have changed since last month owing to backward revision of GDP data). The improvement in the fourth over the third quarter was mainly driven by the external sector, whereas domestic demand growth slowed down a notch from a robust 4.2% annual expansion in Q3 to 4.1% growth in Q4. The slowdown was almost entirely due to consumption and inventories change (quarterly data only published jointly by the Central Bank). Annual data suggest that total consumption experienced a marked slowdown, expanding only 1.8% in 2002, following 2.7% growth in 2001. Gross fixed investment, on the other hand, accelerated from a meagre 0.3% growth in the third quarter to a more resilient 2.5% expansion in the final quarter of the year. Finally, the external sector also added to the acceleration in the final quarter of the year, as exports reverted from a 3.6% contraction in the third to a 0.7% expansion in the fourth quarter while imports added only 3.8% growth in Q4 (Q3: 2.4%).

Fishing leads growth on sectoral basis
On a sectoral basis, fishing led all other sectors in terms of growth, expanding a healthy 10.9% in the fourth quarter compared to the same period the year before. Rather than being dependent on favourable climatic conditions and, thus, following boom-and-bust cycle similar to the Peruvian fishing industry, the Chilean fishing sector tends to benefit from development in fish farming, which has contributed to ever-increasing volumes of salmon exports. As a result, fishing has grown at a robust rate between 5% and 10% in the past years. Agriculture grew 7.5%, following an even more pronounced 7.8% growth in the third quarter, fresh fruits output spiked. Electricity, gas and water constituted the third fastest growing sector in the fourth quarter, adding 6.1% over Q4 2001, more than double the growth rate registered in the third quarter. For the full year, the sector expanded 4.3%. The vigorous growth rate was mostly due to the buoyant electricity sector, whereas gas and water hardly expanded at all.

Manufacturing slumps compared to very robust third quarter
On the lower end of the sectoral growth spectrum, construction marks the red lantern, with zero growth compared to the final quarter of 2001. Government, personal services and real estate also trailed well behind other sectors with annual growth of 2%. Finally, manufacturing stands out since the sector registered the most notable slowdown compared to the third quarter. Growth dropped 2.3 percentage points from a 5.9% pace in third quarter to 3.6% in the fourth. However, the steep slowdown is due to resilient performance of manufacturing in the third quarter, when it constituted one of the fastest growing sectors in the Chilean economy. Compared to the first half 2002, the final quarter performance still stands out positively since it exceeds the full year growth rate of 2.8%. According to the Central Bank, last year’s growth in manufacturing was mainly driven by external demand for Chilean consumer goods.

First data for 2003 are promising
Preliminary data suggest that the positive trend established by the past four quarters will be maintained at least throughout the first quarter this year. In January, the economy expanded 2.6% according to the monthly indicator for economic activity (IMACEC, Indicator Mensual de Actividad Económica). In February, the economy has added further speed. Industrial production advanced at a 7.8% pace, compared to 2.8% in January, amid marked improvements in all industrial good categories (consumer, intermediate and capital goods). Even though unemployment increased from 7.6% in January to 7.9% in February, the increase was entirely due to seasonal factors; compared with the same month last year, unemployment dropped 0.4 percentage points. The data indicate an annual IMACEC growth between 3.5% and 4.0% for February. If the positive development continues at this pace in March, as most analysts expect, then first quarter growth will come in between 3.0% and 3.5%.

Uncertainty over global economy weighs on outlook for Chile
Despite the promising signs from the domestic economy, Consensus Forecast panellists have hiked their forecast only a notch since last month. The lingering scepticism emanates from panellist concerns about Chile’s openness. As the region’s most open economy, Chile depends by and large on the vagaries of the global economic developments. Financial markets have embarked on a rally in the wake of the apparent rapid conclusion of the conflict in Iraq, which has helped bring down oil prices to their lowest levels in four months. Nevertheless, uncertainty about the development of the global economy remains high. Therefore, Consensus Forecast panellists remain cautious about the growth potential for the Chilean economy this year.