Chile - Economic Briefing June 2003

Outlook Improving Slowly Amid Favourable Developments in Domestic Economy

The Chilean economy is showing signs of an accelerated recovery and even though the rebound is still tentative, the outlook is beginning to improve. Employment, which had been a key impediment to higher growth in the past business cycle, is growing. Finally, the very first signs of a potential improvement in the global outlook are beginning to emerge, welcome news for the region’s most open economy.

Economy disappoints in March
In March, the economy expanded 3.6% compared to the same month last year, according to the monthly indicator for economic activity (IMACEC, Indicator Mensual de Actividad Económica). The reading came in well below expectations of 4.0% growth, as markets were upbeat that the economy would continue its strong performance observed in February, when the economy had expanded at an annual 4.7% pace. Moreover, the annual data was inflated by the fact that March 2003 counted one working day more than March 2002. According to seasonally adjusted data, the Chilean economy actually contracted 1.0% over the preceding month.

First quarter GDP below expectations amid sluggish domestic economy
Owing to the disappointing March reading, the first quarter GDP expansion reached 3.5% year-on-year, 0.2 percentage points short of last month’s Consensus Forecast. Nevertheless, according to seasonally adjusted data the economy expanded 0.8% over the fourth quarter 2002 and the annual growth rate also exceeded the 3.2% registered in the last quarter 2002. The external sector was the key factor responsible for the acceleration in annual growth, whereas the domestic side of the economy lost the momentum observed towards the end of 2002. Exports expanded at an annual rate of 5.7% in the first quarter versus the anaemic 0.9% expansion in the fourth quarter last year. Imports also picked up further steam in the first quarter, although at a less pronounced pace than exports, as the growth rate increased from 3.7% in the prior quarter to 5.5%. Further import expansion was curtailed by diminished capital goods imports, whereas intermediate and consumer goods expanded at healthy rates.

Growth of domestic economy slows down amid weaker investment
The domestic side of the economy weakened. According to the Central Bank, domestic demand growth slowed from 4.1% in the fourth quarter to 3.4% in the first, amid an investment slowdown following the encouraging improvement registered in the previous quarter. The weaker outlook for the global economy, war concerns and domestic scandals bore down on investment activities. Consumption obviously also slowed although the aggregate can only be estimated since the Central Bank only publishes joint data for consumption and the change of inventories. This category, denominated other, expanded 4.2% and was thus 0.4 percentage points below the 4.6% growth in the final quarter last year.

Electricity leads growth, propelled by strong manufacturing
On a sectoral basis, electricity, gas and water led growth. The sector expanded a buoyant 7.3% over the same quarter last year (Q4 2002: +6.1% year-on-year), propelled by strong a contribution from the electricity sector. Activity in the gas sector expanded at a more moderate pace and water output even declined. Electricity demand was driven by a rebound in manufacturing activity, which constituted the second fastest growing sector, wit a 6.0% expansion. The first quarter growth rate represents a notable improvement compared to the 3.6% figure recorded in the previous quarter. Increased external demand, particularly for canned products, wooden materials and paper products, bolstered industrial activity.. Intermediate and consumer goods also picked up pace. Mining added 5.3% (Q4: +5.4% yoy), as large-scale private mining operations continued to boost output, while agricultural output rose at a solid 4.9% pace, driven by higher output of fresh fruits and forestry.

Fishing only declining sector amid broad-based growth
Construction expanded 2.5% on an annual basis, a solid improvement when compared to zero growth in the fourth quarter. The improvement was mainly due to increased activity of engineering works, while the housing sub-sector increased at a moderate pace and non-housing activities even contracted. Commercial activities grew 3.2%, virtually unchanged from the 3.1% growth registered in the fourth quarter, as the sector profited from strong industrial sales. The buoyant manufacturing activity also spread to the transport and communications sector, which added 3.5% (Q4: 3.2% yoy), amid higher freight transportation. Finally, fishing constituted the weakest sector at the beginning of the year and represented the only sector that registered a contraction in the first quarter – as activity dropped 14.6% over the same period last year, amid declines in fish farming.

Immediate outlook subdued
The solid yet not stellar economic performance observed in March is likely to continue in April. Growth of industrial production decelerated from a strong 6.9% in March to a lacklustre 0.6% in April. Industrial sales, on the other hand, expanded by 4.1%, a notch faster than in March, and supermarket sales mushroomed 11.4% in April over the same month last year, more than twice the growth rate recorded in March. However, unemployment increased from 8.2% in the first quarter to 8.5% in the moving quarter up to April. While the increase mainly reflected seasonal patterns, the reading was just 0.3 percentage points below the unemployment rate in the same period last year whereas first quarter unemployment recorded a 0.6 percentage point improvement. This suggests that the more benevolent developments in the labour market observed at the beginning of the year are beginning to fade. All things considered, the economy should expand between 3.0% and 3.5% in April. Consensus Forecast panellists estimate second quarter growth at 2.9%, accelerating to 3.3% in the third and 3.8% in the final quarter. For the full year, panellists have hiked last month’s forecast a notch.