Chile - Economic Briefing August 2004

High Unemployment Overshadows Economic Growth

Robust external demand and strong commodity prices continue to provide a favourable backdrop for resilient economic growth this year for the export-dependent economy.  On the domestic side, however, Chile is suffering from unemployment that remains high in spite of the economic pickup.

Economy in line with expectations in June
In June, the economy expanded 5.0% compared to the same month last year, according to the monthly indicator for economic activity (IMACEC, Indicador Mensual de Actividad Económica).  The result was precisely in line with the Consensus Forecast and was virtually unchanged compared to the growth rates observed in April (+5.0% year-on-year) and May (+4.8% yoy).  A month-on-month comparison, however, does not corroborate the continued robustness suggested by the annual figure.  According to seasonally adjusted data, the economy contracted 0.27% over the preceding month, following on a meagre 0.17% monthly expansion in May.  However, despite the slump in the month-on-month comparison, the Chilean economy remains poised to live up to its growth potential this year.  The annual average growth rate inched upwards another notch from 3.9% in May to 4.0% in June, the fourth consecutive increase that confirms the consolidation of the higher growth trend observed in the past months.  According to the preliminary data set, second quarter growth came in at 4.9%, which is in line with Consensus Forecast expectations.  Detailed second quarter data for national accounts will be released on 23 August.

Industrial sector accelerates slightly in June
The overall improvement in economic growth is also reflected in the industrial sector.  In June, industrial production increased 5.1% over the same month last year, somewhat above the 4.5% pace observed in May and consistent with the robust trend of past months, which saw output growth hovering around the 5% mark.  The slight improvement over May was due to a much higher durable and intermediate consumer goods growth as well as a trend change in capital goods output, which reverted from an 8.3% contraction in May to an 18.9% expansion in June.  These positive developments were contrasted by a deterioration in non-durable consumer goods production, which declined 1.8% over June 2003, following on 3.0% growth in May. 

Unemployment continues to rise in second quarter
The improvement in industrial production and the economy as a whole once again stood out against a dismal development in employment.  In the second quarter, unemployment reached 9.6%, up from 9.4% in the moving quarter up to May.  The 0.2 percentage point increase in the unemployment rate over the preceding quarter can be explained by seasonal factors, however, unemployment is also well above last year’s level, which confirms the deteriorating trend observed in the recent months.  In the second quarter 2004, unemployment exceeded the rate observed in the same period last year by 0.5 percentage points. 

Stubbornly high unemployment in spite of high growth raises concerns
The increase in unemployment is unexpected and particularly odd against the background of robust economic growth.  The high unemployment rate has incited a debate about the causes for its stubborn persistence in spite of resilient growth.  No single cause explains the continued high unemployment rates.  Instead, a host of factors explain the current high unemployment trend.  First, unemployment typically lags behind the overall economy, as companies generally wait for a stabilisation of the upward trend before starting to hire a new workforce.  This delay adds a lag time to the hiring process itself and postpones the pick up in employment.  This general rule is also at work in the Chilean economy.  However, the economy actually is generating less new jobs than last year when economic activity had been growing at a lesser rhythm.  In the second quarter last year, the economy generated 207,000 new jobs over the same period the prior year.  In the second quarter this year, however, this number has dropped to only 33,000 and was thus not sufficient to absorb the increase in the workforce of 74,000, which explains the increase in the unemployment rate over last year. 

Trend to higher quality jobs partly explains high unemployment
A breakdown by category of occupation reveals that the number of self-employed and non-remunerated family members dropped substantially over the second quarter last year, whereas the number of wage earners increased over the same period.  This suggests that part of the high unemployment can be explained by a shift to higher quality jobs from lower quality jobs, which, in turn, remain vacant.  However, despite these explanations, some questions remain open.  In the second quarter, the workforce in the industrial sector shrank despite the sector’s robust growth, which only leaves an increase in productivity as an explanation.  However, recent investment data do not sufficiently explain the gap between robust growth in the industrial sector and lower employment. 

Outlook remains robust as external sector benefits from increasing global demand
The high unemployment raises questions about the sustainability of the current upswing once the impetus from higher global demand and rising commodity prices begins to ebb.  Consensus Forecast panellists expect that the Chilean economy will step up the pace observed in the first half and anticipate the economy to expand by 5.1% in the second half, resulting in 4.9% expansion for the full year.  In 2005, the economy is anticipated to keep up the pace, with growth forecasted at 4.8%, down a notch from last month’s projection.