Chile - Economic Briefing April 2004

Economy Propelled by Global Rebound and Buoyant Copper Prices

The already robust outlook for the Chilean economy has improved further.  After slumping in the wake of sluggish global demand, the export-dependent economy is now reaping the benefits of the global rebound.  In addition, the country is profiting from a strong surge in the price of copper, its key commodity.  On the domestic side, declining unemployment, increasing consumer confidence and record low interest rates are providing for an additional impetus.

Fourth quarter GDP comes in line with expectations
In the fourth quarter, gross domestic product (GDP) increased by 3.3% over the same quarter last year, confirming the growth reading reported last month based on preliminary figures.  The fourth quarter growth was slightly ahead of the 3.1% annual growth registered in the third quarter. Moreover, the growth pattern was very level throughout 2003, which is reflected in full-year expansion of 3.3%. 

Domestic demand replaces external demand as key driver for economic growth in the final quarter 2003
The similar overall growth rates observed in the third and fourth quarter hide significant differences in the composition of growth.  In the fourth quarter, domestic demand constituted the principal pillar of economic dynamism, replacing the external sector that had been the key driver behind the third quarter expansion.  Growth in domestic demand mushroomed from an anaemic 0.6% in the third quarter to a very resilient 5.5% in the fourth.  In the final quarter, consumption and inventories – the Central Bank only publishes joint data – increased 5.6% over the fourth quarter in the prior year, registering a marked improvement compared to virtual zero growth in the third quarter.  Gross fixed investment also improved notably compared to the 2.2% growth observed in the third quarter, more than doubling the pace to 5.5% in the final quarter.  The improvement was due to a swing in investment in machinery and equipment.  As the outlook for the Chilean economy improved, businesses shed their pessimism, which had prompted a 2.8% decline in the third quarter, and increased investment in machinery and equipment of 6.5% over the same period the year before.  Construction, on the other hand, lost some dynamism, slowing the overall performance in gross fixed investment.  The contribution of the external sector, which had pushed the economy forward in the third quarter, dropped notably.  Growth in exports declined to less than half the robust 13.9% pace registered in the third quarter.  In contrast, import growth, which is a subtraction in the calculation of GDP, almost tripled to 13.9%, thus further diminishing the net contribution of the external sector.

Manufacturing accelerates amid higher external demand
Differing developments are also reflected in the economic sectors.  The manufacturing industry, the most important sector of the economy, experienced an improvement, as the pace increased from a lacklustre 0.4% in the third quarter to 2.0% in the final quarter of the year.  According to the Central Bank, the sector profited from a pickup in external demand for Chilean manufactures, amid the rebound in global demand.  Growth in commerce, restaurants and hotels also accelerated, adding 1.1 percentage points over third quarter growth to 5.2% in the fourth quarter and thus represented the fasted growing sector of the economy.  In particular, an acceleration in commercial activities towards the end of the year accounted for the high growth rate, whereas hotels and restaurants exhibited less dynamic developments. 

On the bottom end, fishing and mining experienced notable slowdowns.  The decline in fishing activity widened from the 3.1% contraction in the third quarter to a 16.8% drop in the fourth quarter.  The decline reflects a reduction in the output of salmon fish farms, which were partly mitigated by substantial increases in international prices.  Growth in mining output slowed down from 8.1% to 3.7%.  Nevertheless, the prospects for the sector remain excellent and mining is likely to constitute a principal driving force of the Chilean economy in the future.  In the first quarter, copper prices rose 64.2% over the same period last year, even quickening the strong upward trend observed for several months before.  The sustained increase in copper prices is beginning to attract new investment.  On 6 April, BHP Billiton, the world's biggest mining group, unveiled a US$ 870 million plan to expand copper mining at Escondida, already the world's biggest copper mine.  The new project will start in the second half of 2006 and produce an additional 180,000 tons a year.   

Economy powers ahead in February amid strong industry and improving unemployment figures
The immediate prospects for the Chilean economy continue to improve.  In February, the economy expanded 4.2% compared to the same month last year, according to the monthly indicator for economic activity (IMACEC, Indicador Mensual de Actividad Económica).  The February reading constituted a significant acceleration compared to the 3.1% growth registered in January.  Moreover, seasonally adjusted data suggest an even stronger acceleration since the economy expanded by 1.24% over the preceding month, more than double the pace observed in January and the fastest pace in a year.  More detailed data suggest that the momentum will remain strong.  In February, industrial production added 8.0% over the same month last year, the highest growth rate in more than a year.  In addition, in the November-February moving quarter, unemployment remained at the 7.4% level registered in the preceding two moving quarters, defying the seasonal trend to higher unemployment typically observed in the second month of the year.  The drop represented a 0.5 percentage point decline over the same period last year.