Chile - Economic Briefing August 2003

Between Slump and Recovery

The Chilean economy continues to move erratically, surprising on the upside at one moment and on the downside in the next. On the positive side, favourable developments in employment and a benign monetary environment provide a solid backdrop for a recovery of domestic demand. On the other hand, the below-potential global economy limits the upside for the Chilean economy.

Economy disappoints for third consecutive month
In May, the economy expanded 2.5% 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 the 3.1% growth rate that Consensus Forecast panellists had expected last month. In combination with the equally disappointing 2.7% annual growth registered in April, the data seem to confirm that the bout of strength observed in February and March, when the economy had expanded at an annual 4.7% and 3.6% pace has already ended. However, the data are distorted by seasonal factors. According to seasonally adjusted data, the Chilean economy actually expanded 0.81% over the preceding month, following on two months of contractions.

Ambiguous signs in June: industry slumps …
More recent economic indicators from June present an ambiguous picture of future economic developments, a situation characteristic of the past months. Industrial production rose 2.2% in June over the same month last year, almost half the growth rate registered in May. The industry indicator usually exhibits very erratic movements but the slump is also corroborated by the quarterly average, which smoothes out the volatile monthly shifts and which dropped in June for the fourth consecutive month to 2.3% from 5.3% in the moving quarter up to February. The June slump in industrial output was exclusively concentrated in intermediate consumer goods output, where growth slowed from 6.8% in May to 2.7%. Activity in the durable consumer goods, non-durables and capital goods sectors actually improved, most notably non-durable consumer goods, which added 2.9% over June 2002, following on almost zero growth in May.

… But employment develops favourably
Unemployment reached 9.1% in the second quarter. While the second quarter figure is 0.3 percentage points higher than the number for the moving quarter up to May, the increase is entirely due to seasonal factors. In fact, when compared with the same month last year, unemployment actually dropped 0.4 percentage points. Moreover, the number of the employed is growing at a more rapid pace. After having reached zero growth in August last year, employment growth had continuously risen to a 3.9% high in May and in June the pace of expansion remained at a strong 3.7%.

Dismal development mars outlook
The recent data suggest that the bout of strength observed towards the end of the first quarter was not sustained throughout the second quarter. For June, the Consensus Forecast panellists expect the economy to advance at an annual 2.8% pace, which would leave second quarter growth at only 2.7%, well below the 3.5% expansion observed in the first quarter. For the second half, some optimism about an uptick in the global economy still remains. A more favourable global scenario would support the recovery of the domestic economy. Therefore, the Consensus sees the economy accelerating again, with growth reaching an average 3.6%. The forecast for the full year was maintained at 3.3%.