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Economy
below expectations in November
In December, 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). Thus the economy expanded at
the same pace as observed in November. However, according to seasonally
adjusted data, the economy contracted 0.24% in December over the preceding
month, compared to a 0.43% monthly expansion registered in November. The
outcome in the final month of 2003 implies 3.3% growth in the fourth
quarter and 3.2% for the full year. Official data for the fourth quarter
and the full year of 2003 will be published on 23 March.
Economy develops as expected
in January but unemployment unchanged
More recent data suggest that the Chilean economy is off to a good start
this year but some doubts remain. According to preliminary data from the
Central Bank, the economy expanded 3.1% in the first month of the year
compared to the same period last year. This actual outcome was precisely
in line with market expectations. According to seasonally adjusted data,
the economy expanded 0.7% over the preceding month. Additional data
provide a more ambiguous picture of the current state of the Chilean
economy. In the October-January moving quarter, unemployment remained at
the 7.4% level observed in the preceding moving quarter, which represented
a 0.2 percentage point decline compared to the same period last year. As
of February, unemployment is likely to begin to rise again, as the
beneficial seasonal factors, such as hiring in the agricultural sector and
additional commercial activity related to the holiday season, subside.
Moreover, when these seasonal effects are taken into account, the
improving trend in unemployment seems to abate. The 0.2 percentage point
decline in the unemployment rate over the year-ago period is just half the
0.4 percentage observed in the in the preceding quarter and just a quarter
of the 0.8 percentage point improvement registered in the quarter up to
October 2003.
Industrial output accelerates
but sales slow
The industrial sector also provides an unclear picture in the first month
of the year. Industrial output increased 1.8% over the same month last
year, thus improving over the meagre 1.2% growth observed in the final
month of 2003. The improvement was due to a massive swing in output of
durable consumer goods which reverted from a 21.5% contraction in December
to a 25.0% expansion in January. This improvement, however, was
contrasted by a deterioration in non-durable consumer goods, which account
for the bulk of industrial output and which dropped 1.1% over January
2003, down from 4.4% annual growth in December. Industrial sales
contrasted the positive development in output, as growth retreated from
the 5.4% in December last year to 2.2% in January.
Outlook improves as domestic
conditions improve
Despite the somewhat ambiguous picture presented by January economic data,
the outlook for the Chilean economy is good. The favourable external
setting is complemented by improving conditions on the domestic side of
the economy. The modest improvement in the employment situation and the
resulting boost to consumer confidence should buttress domestic demand.
Moreover, the Central Bank has been able cut interest rates to historic
lows in the wake of the strong decline in inflation, which will further
boost investment and consumption. The external sector should provide an
even stronger impetus for the Chilean economy. With one third of total
activity depending on exports, the economy stands to profit immensely from
the continued global recovery. Moreover, the global rebound is driving up
commodity prices. In particular copper, which accounts for almost 40% of
total exports, has already shot upwards. By the end of February, copper
prices reached US$ 2,987 per tonne, which is 74.1% above the year-ago
price. Consensus Forecast panellists had already factored in the improved
setting to the economic outlook and maintained their forecasts for full-year
economic growth at a very robust 4.7%. Moreover, growth is likely to
remain on such a high level. Consensus Forecast panellists believe the
economy will grow at 4.8% in 2005, up a notch from last month’s forecast.
Chile at the brink of
deflation
Chile is approaching deflation. In February, consumer prices were
unchanged over the previous month. The February reading was expected by
markets and followed on a 0.18% drop in January. The price stability
observed in February was the result of lower food, household equipment and
clothing prices, contrasted by higher prices for housing and
transportation. The February reading represents the fifth consecutive
month of either declining or unchanged prices. As a result, annual
headline inflation dropped further from 0.8% in January to 0.0% in
February. This rate represents the lowest annual inflation rate
registered since 1935. If the current trend continues – inflation has
dropped from a multi-year high of 4.5% in March 2003 to its current level
– Chile will enter deflationary territory in the short-term. In fact,
additional price data corroborate this development. The core inflation
index, which excludes volatile categories, such as fuels as well as fresh
fruits and vegetables, dropped 0.17% in February, following on a similar
decline in January. As a result, the annual core inflation rate dropped
from 1.5% in January to 0.7% and is rapidly approaching the zero mark.
Finally, wholesale price have been in negative territory since October
last year and continue to drop at a quick pace. In February, wholesale
prices declined at an annual rate of 6.7%.
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