Chile - Economic Briefing May 2004

Record Trade Flows Drive Economy

The export-dependent economy is now reaping the benefits of the global rebound.  After slumping in the wake of sluggish global demand, Chile is registering record trade flows, as the pickup in global demand is accompanied a higher price for copper, its key commodity.  On the domestic side, the country is experiencing a deflationary bout, which has prompted monetary authorities to cut interest rates to historic lows, providing for an additional impetus to domestic demand growth.

Economy above expectations in February
The Chilean economy appears to be living up to its growth potential this year.  In March, the economy expanded 6.3% compared to the same month last year, according to the monthly indicator for economic activity (IMACEC, Indicador Mensual de Actividad Económica).  The actual result was precisely in line with the Consensus Forecast and exceeded the 4.2% expansion rate observed in February.  A month-on-month comparison, however, does not corroborate the improvement observed in the annual figure.  According to seasonally adjusted data, the economy remained flat over the preceding month, following on 1.24% monthly growth in February, which had marked the fastest monthly growth rate in a year. 

Industrial sector continues to grow at robust pace in March but …
More recent data suggest that the momentum observed in the first two months continued into the third and prompted a strong first quarter.  In March, industrial production increased 7.8% over the same month last year, almost maintaining the fast 8.0% pace observed in February.  The slight deterioration over February was due to a massive swing in capital goods output, which dropped from an unsustainable 67.3% expansion in February to a more subdued but still robust 13.2% growth rate in March.  Growth in durable and non-durable consumer goods also slowed, albeit on a more moderate scale.  However, intermediate consumer goods, which account for the lion share of industrial production, compensated for the weaker growth of the other categories and accelerated from the 8.8% growth registered in February to 10.5% growth in March.  Industrial sales continued to accelerate and added 9.0% over the same month last year, following on 6.0% growth in February. 

… unemployment rises unexpectedly
Unemployment data, on the other hand, added some ambiguity to the current state of the economy.  In the first quarter, unemployment rose to 8.1% from 7.4% in February.  The increase follows a seasonal pattern, which typically has unemployment rising in the first months of the year.  However, when compared to the same period last year, the unemployment rate dropped only one tenth of a percentage point, which was notably worse than the 0.5 percentage point improvement seen between February last year and February 2004.  In fact, in March the absolute number of unemployed increased for the first time in six months and the economy generated the fewest new jobs since January 2003. 

Economy powers ahead in February amid strong industry and improving unemployment figures
The economy seems to have had a good start this year.  Based on the preliminary data, the economy expanded by 4.5% in the first quarter.  Moreover, the prospects for further healthy growth in the Chilean economy continue to improve.  The already favourable external setting is being complemented by a continuously improving domestic economy.  In addition, the Central Bank has cut interest rates to historic lows, to pull the country clear from the deflationary bout entered in March.  The loose monetary policy setting will boost investment and consumption and thus will further fuel the domestic economy.  The external sector should provide an even stronger impetus to the economy in the coming months.  With one third of total activity depending on exports, the economy will profit immensely from the continued recovery in the global economy.  However, the strong rise in copper prices that had in part accounted for the improved outlook of the external sector has abated.  In April, the copper price dropped 10.3%.   While the current price level is still 71.6% above last year, the drop ends a string of sharp price increases, which took the copper price to a multi-year high.  Consensus Forecast panellists had already reflected these positive developments into their forecasts and maintained their outlook unchanged since last month at 4.8%.  Moreover, the economy is anticipated to grow even a notch faster in 2005.