Chile - Economic Briefing May 2003

Outlook Subdued Despite Favourable Developments in the Economy

The Chilean economy is showing signs of an accelerating recovery. Moreover, unemployment levels, which remained stubbornly high in the past business cycle, are also dropping. Nevertheless, the outlook for this year remains subdued. First, financial scandals in the public sector are eating into Chileans’ confidence in the economy and second, as the region’s most open economy, Chile can only fully rebound in a scenario of more robust global economic growth than currently expected.

Economy surprises positively in February
In February, the economy expanded 4.6% compared to the same month last year, according to the monthly indicator for economic activity (IMACEC, Indicator Mensual de Actividad Económica). The reading not only exceeded January’s 2.6% growth rate but also market expectations, which had already anticipated a strong 4.0% expansion, as previously released data for industrial production and employment suggested a robust second month. Moreover, according to seasonally adjusted data, the Chilean economy expanded at an even faster clip than suggested by the annual data. Compared to January, the economy added 1.66%, which if it were sustained throughout 12 months would be equivalent to an annual growth rate of more than 20%. The resilience of industry and a healthy external sector helped bolster the economy. While the stimulus from the external sector is likely to have lasted throughout March (with exports growing at an even faster clip), industrial production growth has slowed from 7.8% in February to 6.9% in March. However, the March industrial output figure is well above the trend observed in the past months and is accompanied by favourable developments in employment. In the first quarter, unemployment reached 8.2%. While this represents an increase over the 7.9% registered in the moving quarter up to February, the increase is entirely due to seasonal factors. Compared with the same period last year, unemployment actually dropped 0.6 percentage points. Healthy industrial production data, buoyant exports and improving employment data suggest a strong March reading for the IMACEC. Consensus Forecast panellists expect the economy to expand 4.0% in March over the same month last year. This would put first quarter growth at 3.7%, ahead of the 3.2% annual growth in the final quarter of 2002, thus, confirming the steady upward trend observed since the first quarter last year.

Robust first quarter expected but scandals and global outlook overshadow perspectives
Despite the current encouraging developments, the economic outlook for this year is marred. The recent scandals in the public sector, which led to the resignation of the Central Bank President and the Superintendent of Securities and Insurance (details see April 2003 edition of the LatinFocus Consensus Forecast), have undermined confidence in the economy, which may weaken economic activity in the current quarter. Moreover, the subdued global outlook continues to forestall a more pronounced rebound of the Chilean economy. As the region’s most open economy, potential growth can only be achieved amid a more resilient global economy. Therefore, growth is seen tapering off in the second quarter and the projection for the full year is unchanged from last month.

Headline and core inflation converging in April
In April, consumer prices dropped 0.10%. The downward movement stands in stark contrast to the sharp March increase (+1.17%) but was largely expected since developments in oil markets in the wake of the rapid victory in Iraq had suggested a strong moderating impact on fuel and related price categories. In fact, the actual outcome was on target with the market forecast. As a result of the April price decline, annual headline inflation dropped half a percentage point from March to 4.0% in April. Fuel prices fell 8.53% in April, the highest monthly drop since the National Statistical Institute (INE) began tracking fuel prices in 1999. Consequently, housing and transport price increases, which depend to a large extent on fuel prices, decelerated significantly compared to March. The increases in these categories were accompanied by very moderate price increases in other categories, which were insufficient to compensate for the strong fuel price drop. The price index for core inflation, which excludes the more volatile categories such as fuels and fresh fruits and vegetables, increased 0.60% in April, taking the annual rate from 2.4% in March to 3.1% in April. Thus, headline inflation and core inflation are converging towards the centre of the Central Bank’s 2% to 4% target range, just as the monetary authority had presaged in its January 2003 inflation report. Consensus Forecast panellists expect the current downward trend in headline inflation to…