Chile - Economic Briefing August 2003

Between Slump and Recovery (continued)

Consumer prices drop yet again in July
In July, consumer prices dropped 0.09%. The actual reading was below expectations, which had seen prices rising by 0.1% in July. Moreover, July represents the fourth consecutive month of declining or unchanged consumer prices. Unlike previous months, the July decline in consumer prices was broad-based, as all price categories, with the exception of food, registered prices declines when compared to June. As a result of the July drop in consumer prices, annual headline inflation fell 0.5 percentage points over June to 3.1%. Thus, headline inflation is now at the centre of the 2 to 4% target range set by the Central Bank, after having peaked at 4.5% in March of this year. Core inflation dropped even further below the 3% threshold. In July, the price index for core inflation dropped 0.06%, taking the annual rate from 2.7% in June to 2.5%. Consensus Forecast panellists have maintained their year-end forecast from last month unchanged at 3.3%.

Peso continues to stabilise
The exchange rate market continues to stabilise following almost a year of high volatility, which had the Chilean peso breaking through the 750 pesos per US$ threshold in October last year and March of this year. Since 11 March, when the peso had reached an all-time high of 758 pesos to the US$, the currency had strengthened substantially to 694 pesos per US$ by mid-May and has been hovering around 700 pesos per US$ ever since. In July, the currency weakened somewhat compared to the level observed at the end of June (697 pesos per US$). However, the 1.2% depreciation in nominal terms versus the US$ represents one of the lowest variations observed in the past months. In addition, the monthly average exchange rate strengthened for the sixth consecutive month to 701 pesos to the US$ in July. The recent strengthening confirms previous Consensus perceptions that the weakening trend observed at the beginning of the year did not reflect economic fundamentals and would consequently be reversed by the end of this year. As a result, Consensus Forecast panellists have revised their year-end forecast of 715 pesos to the US$ expected last month to the current 709 pesos to the US$.

Trade flows increase strongly in July
In July, the trade surplus reached US$ 231 million. The surplus was somewhat below the US$ 292 million surplus reached in June this year but well ahead of the US$ 198 million surplus in July 2002. While the trade surplus remains in the range of the expected, both exports and imports rose at far above average rates. Exports mushroomed by 27.0% over the same month last year and imports rose by 28.7% over the same period. The strong growth rates are in part due to statistical effects, as part of June copper shipments were accounted for in July. However, the figures also suggest that the weak June reading – exports and imports fell slightly over June 2002 – did not augur a weakening in the external sector. As a result, the external sector should contribute positively to the tentative recovery of the Chilean economy, despite the fact that the global economy is faltering. Consensus Forecast panellists expect exports to increase 8.7% this year, following on last year’s 0.7% contraction. Imports will develop in tandem, expanding 8.3% this year, according to the Consensus. As a result, the trade surplus will swell from US$ 2.5 billion last year to US$ 2.8 billion this year.