Chile - Economic Briefing November 2003

Economy Gets a Lift from Global Rebound

The Chilean economy is well poised for faster economic growth next year. Chile is the most open economy in Latin America and stands to profit most from the long anticipated rebound in global economic activity. Buoyant demand from China and other world regions has already boosted the price of copper, Chile’s main commodity. As a result, exports are exhibiting strong growth and are likely to continue to be the locomotive for the rest of the economy.

Economy disappointingly weak in August
In August, the economy expanded 1.2% 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 2.7% growth rate that Consensus Forecast panellists had expected last month. Moreover, the August reading represents a significant slowdown compared to the 3.0% growth registered in June and the 3.5% in July. Seasonally adjusted data confirm the dismal performance, as the economy contracted 0.07% over the preceding month compared to 0.30% monthly growth observed in July.

Robust industry and stable unemployment suggest strong September
More recent economic indicators suggest that the economy will accelerate again in September. Industrial production increased at 5.8% in September, more than twice the 2.1% growth observed in August. Mushrooming capital goods production propelled industrial output but improvements in consumer and intermediate goods also contributed to the stronger September reading. Furthermore, in the July-September quarter, unemployment remained unchanged over the preceding quarter at 9.4%. Compared to the same quarter last year, the unemployment rate dropped 0.3 percentage points, which was better than the 0.2 percentage point improvement in the preceding quarter. If it were not for the constant increase of the workforce due to the growing population, unemployment would have dropped even further, as the number of the employed is growing at a rapid pace (+2.7% year-on-year).

Outlook rosy, as global rebound drives demand for copper and other Chilean goods
The preliminary data suggest an annual growth rate of 3.5% for the entire economy in September, according to this month’s Consensus. In July the economy had grown at the same pace. However, due to the bout of weakness in August, third quarter growth should come in at only 2.7% over the same quarter last year, unchanged from the pace observed in the second quarter. For the fourth quarter, most Consensus Forecast panellists expect economic growth to accelerate. Buoyant demand from China and a rebound in demand from other world regions have boosted the copper price. As a result, the average copper price in October was 29.4% above the level registered in the same month last year and the dynamics of the global economy suggest that the current price trend for Chile’s key commodity could persist into the near future. Moreover, the expected general economic strengthening in key global regions also bodes well for the rest of the economy. With almost a third of total output directed to overseas markets, Chile is the most open economy in Latin America and stands to profit most from the long anticipated rebound in global economic activity. Exports are already exhibiting strong growth and are likely to continue to be the locomotive for the rest of the economy. In September, exports increased 19.0% over the same month last year. Rather than being a one-time surge, the September reading confirms the trend of surging exports already observed in July and August. As a result, in the third quarter, exports increased 22.1% over the same period last year. The resilience of the external sector will only be felt to have a sizeable positive impact on the rest of the Chilean economy in the coming year, when GDP is expected to expand by 4.3%, following on this year’s 3.2% growth.