Chile - Economic Briefing January 2004

 Rising Hopes Amid Global Rebound

The Chilean economy will experience solid growth this year.  Given that the long-waited global rebound is finally materialising, the country can reap the benefits of the free trade agreements the government has reached over the past years.   Higher demand from China and other world regions has already boosted the copper price to a multi-year high and exports of Chile’s main commodity have grown significantly.  Meanwhile, the Central Bank has cut interest rates to record lows as inflation has dropped well below target levels.

Economy slightly below expectations in October
In October, the economy expanded 3.6% compared to the same month last year, according to the monthly indicator for economic activity (IMACEC, Indicador Mensual de Actividad Económica).  The reading came in slightly below the 3.8% growth rate that Consensus Forecast panellists had expected last month.  Moreover, the October figure represents a moderate slowdown when compared to the 4.2% growth registered in September.  According to seasonally adjusted data, the economy added 0.35% over the preceding month, half the rate observed in September. 

Unemployment continues to drop as businesses resume hiring
More recent economic indicators suggest that the economy continued to develop favourably in the last two months of the year, providing a solid backdrop for more accelerated economic growth in 2004.  In November, industrial production increased at 1.5% over the same month last year.  This number is weaker than the 1.8% annual expansion observed in September.  However, industrial sales were much stronger (+4.8% year-on-year after +0.7% yoy in September), thus compensating for the weaker industrial production data.  The deceleration in industrial production seized all sub-sectors (durable and non-durable consumer goods as well as intermediate goods) except capital goods, which added 40.5% over October 2002.  Unemployment continued its downward trend.  In the August-November quarter, unemployment dropped from 8.8% in the preceding moving quarter to 8.1%.  In the third quarter, unemployment had stood at 9.4%.  The bulk of the decline was due to seasonal factors, as the hiring in the agricultural sector and additional commercial activity related to holiday spending absorbed a number of unemployed.  However, even when these seasonal effects are taken into account, unemployment is easing, as the 0.7 percentage point decline in the unemployment rate over the same period in 2002 indicates. The improvement was due to two factors.  First, businesses resumed hiring after a lacklustre period lasting well into the first quarter of last year.  Currently, the number of new jobs is increasing at 2.6% annually.  Second, the growth rate of the work force is diminishing.  After having peaked at 3.5% in the quarter up to May, the rate dropped to 1.8% in the moving quarter up to November of last year.  

Dropping unemployment could revive domestic demand
The increasing number of new jobs promises to revive consumption, which had slumped in the third quarter and could further fuel the economy, which is already feeling the long awaited beneficial effects from increasing global demand.  Consensus Forecast panellists believe the economy to have expanded by 3.7% in the final quarter of 2003.  In the first quarter, economic growth is expected to accelerate to 4.8%.  For this year as a whole, Consensus Forecast panellists anticipate 4.6% growth, up 0.3 percentage points from last month’s forecast.