Chile - Economic Briefing July 2003

Government Adjusts Public Spending to Meet Deficit Target

The recovery this year will remain moderate as the Chilean economy can only reach its full potential along a more robust global economy. Meanwhile, the government keeps its reputation as a defender of strict fiscal discipline by cutting expenditure and raising taxes in order to meet this year’s deficit target.

Economy disappoints for second consecutive month
In April, the economy expanded 2.7% 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 3.0% to 3.5% growth, as markets were upbeat that the economy would continue the more robust pace observed in February and March, when the economy had expanded at an annual 4.7% and 3.6% rate respectively. Moreover, the annual data was inflated by seasonal factors. According to seasonally adjusted data, the Chilean economy actually contracted 0.26% over the preceding month.

First May data raise hopes for resilient growth
However, first data for May suggest that the economy will return to the more resilient pattern registered in the firsts months of the year. Industrial output expanded by 4.0% year-on-year, significantly stronger than the lacklustre 0.6% growth registered in April. The pick-up in the growth rate in industry was mainly due to stronger expansions in all categories of consumer goods (durable, non-durable and intermediate), whereas capital goods output contracted at a quicker pace than in April. Unemployment data also underpin a trend for higher growth. In the moving quarter up to May, unemployment reached 8.8%, up from 8.5% registered in the quarter up to April. However, the increase in the open unemployment rate was attributed to seasonal factors - compared to the same period last year, unemployment actually dropped 0.3 percentage points. Moreover, the number of employed continued to increase at an ever quicker pace in the first five months of the year and in the quarter up to May, 5.6 million people where officially employed, 3.9% more than in the same period last year.

Trade flows continue to grow in spite of global slump
Finally, trade data also suggest that economic growth picked up in May, as exports added 13.3% over May 2002, whereas import growth receded from 21.1% to 4.1%. While monthly data may be inflated by short-term factors, annual trade data confirm the trend of improving trade flows. Up to December, both annualised figures for exports and imports had been falling, entering in positive territory in January (exports) and February (imports) and increasing every month since then to above 6% year-on-year in May. Exports benefit from higher demand for industrial products. Copper exports, Chile’s main commodity, which account for almost 40% of total exports, on the other hand, stalled a more robust expansion of exports. Annualised imports increased across the board, with growth most pronounced in oil imports, which rose by almost a third on an annual basis up to May.

Outlook maintained
For May, the Consensus Forecast panellists expect the economy to advance at an annual 3.1% pace. If sustained throughout June, second quarter growth would come in at 3.0%, which would be in line with the 3.5% expansion of the first quarter, considering the Easter effect. In the second half, the economy is seen to accelerate, as the benign interest rate environment and a moderate pickup in the global economy should spur demand for Chilean products. The forecast for the full year was maintained unchanged since last month.