Chile - Economic Briefing February 2004

Sun Shines Brightly over Economy

The outlook for the Chilean economy is improving markedly.  The region’s most open economy is benefiting from the recovery of the United States and the major Asian economies as well as rising demand from its key regional trading partners, Argentina and Brazil.  On the domestic side of the economy, declining unemployment, increasing consumer confidence and record low interest rates should boost domestic demand.

Economy below expectations in November
In November, the economy expanded 3.2% 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 3.7% growth rate that Consensus Forecast panellists had expected last month.  Moreover, the November figure represents a moderate slowdown when compared to the 3.6% growth registered in October.  According to seasonally adjusted data, the economy added 0.46% over the preceding month, which was better than the 0.35% monthly increase observed in October.  The November pace was confirmed by preliminary data for December released by the Central Bank in February.  The Bank stated that the economy expanded by 3.2% annually in December, which implies 3.3% growth in the fourth quarter and 3.2% for the full year 2003.  Official data for the fourth quarter and the full year of 2003 will be published on 23 March.

Unemployment continues to drop but …
While not all economic indicators came in above or in line with expectations, the leading gauges 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 the September-December quarter, unemployment dropped from 8.1% in the preceding moving quarter to 7.4%.  The bulk of the decline was due to seasonal factors, as hiring in the agricultural sector and additional commercial activity related to the holiday season absorbed many unemployed.  However, even when these seasonal effects are taken into account, unemployment is improving, as the 0.4 percentage point decline in the unemployment rate over the same period in 2002 indicates. 

… industrial output slumps
While unemployment is improving, the industrial sector continues to raise concerns about the robustness of the current recovery.  In December, industrial production grew by 1.2% over the same month last year.  The latest reading indicates that a downward trend may be emerging, as the industrial output growth rate continued to drop for the third consecutive month after peaking at a 5.8% annual growth in September.  As a result, industrial output increased by only 1.6% in the fourth quarter over the same period last year, significantly below full year growth rate of 2.7%.  Industrial sales, however, countered the downward trend, repeating the acceleration pattern observed in the past months, culminating in a 5.4% growth rate in December (Q4: +3.6% year-on-year, 2003:  +3.5%).  The outlook for the industrial sector should improve this year.  In 2003, the development was characterised by weak durable consumer goods, which dragged down the entire sector in contrast to a rather favourable development in the other components of industrial output, in particular capital goods, which expanded at a healthy 9.0% rate last year.  If unemployment continues the downward trend, consumer confidence should rise, which would benefit the durable consumer goods sector. 

Favourable international conditions provide good backdrop for growth this year
Despite the ambiguous signs towards the end of the year, a number of factors suggest that the outlook for the Chilean economy is improving.  On the external front, the economy is benefiting from a recovery in the United States and in the major Asian economies.  Moreover, key economies in the region, namely Argentina and Brazil, are promising better economic performance after major setbacks in the past years that had notable repercussions in Chile.  The improved global economic outlook has already revived commodity prices, in particular copper, Chile’s main export product, which accounts for more than one third of total exports.  The copper price has rebounded significantly in the past months.  Finally, the country is profiting from favourable international financial conditions.  Just as its regional peers, Chile took advantage of the international investor appetite for emerging market debt by issuing new sovereign bonds.  On 23 January, Chile placed a US$ 600 million bond at a spread of 43 basis points over LIBOR (London Interbank Offered Rate), which corresponded to 3.36% fixed interest rate  The new bonds’ interest rate compares very favourably to the 5.5% obtained in the last issuance in international capital markets.  Furthermore, the international rating agency Standard & Poor’s affirmed its recent rating upgrade from “A minus” to “A” and on 2 February 2004, another international rating agency, Fitch, upgraded Chile’s long-term foreign currency rating outlook from ‘Stable’ to ‘Positive’ and affirmed its rating in “A-”.  Fitch highlighted improved fiscal transparency and the advancement in adopting growth-oriented economic policies as key reasons for the improved outlook.  Ratings analysts even indicated that Chile could receive a rating upgrade to “A”· if there is evidence that economic policies begin to have an impact on the growth of GDP and exports in the medium-term.