Chile - Economic Briefing October 2004

Copper Sends the Economy to Old Highs (continued)

Outlook remains robust despite stubbornly high unemployment
Despite the persistently high unemployment, the Consensus remains optimistic about growth prospects.  Consensus Forecast panellists expect that the economy will step up the strong 4.8% pace observed in the first half and anticipate the economy to expand by 5.1% in the second half, resulting in a 5.0% expansion for the full year, which is unchanged from last month’s forecast.  In 2005, the economy is anticipated to keep up the pace, with growth expected at 4.8%.  The current Consensus is thus in line with the latest Central Bank  forecast of 4.5% to 5.5%, published in the Monetary Policy Report (MPR) presented to Congress on 14 September.

Government presents budget to Congress
On 30 September, the government presented the 2005 budget bill to Congress.  The budget is based on the assumption of a 4.2% trend growth rate in GDP.  The trend growth rate, which is calculated by a group of independent consultants for the next five years, is used to keep spending within the limits of the 1% structural surplus rule.  The structural surplus rule mandates the government to incur a surplus equivalent of 1% of GDP, assuming trend growth.  This reduces the impact of the business cycle in government spending and enables the government to pursue counter-cyclical policies without jeopardizing fiscal soundness.  For 2004, the expert panel had calculated a trend growth rate of 3.9%. 

In addition, the budget assumes a long-term copper price of US$ 0.93 per pound, well above last year’s copper price estimate but below the average price of US$ 1.26 per pound observed in the first eight months of the year.  Based on the underlying budgetary assumptions, the government estimates structural revenues to increase 5.5% and similar growth in expenditures, which is in line with the 1% structural surplus rule.  However, since the government estimates the actual copper price and economic growth to be above the long-term estimates in 2005, transitory revenues should increase at a faster pace, resulting in a current fiscal surplus above 1% of GDP.  In its MPR, the Central Bank estimates a copper price of US$ 1.15 per pound.  Consensus Forecast panellists expect a surplus equivalent of 0.6% of GDP this year, falling to 0.4% of GDP in 2005.

Consumer prices virtually unchanged in September
In September, consumer prices increased 0.05%, which was below market expectations of 0.25% and well below the 0.38% increase observed in August.  In fact, according to the National Statistical Institute (INE), the rise observed in September was the lowest registered for this month since 1931.  Higher food and apparel prices exerted some upward pressure, which was offset, however, by lower prices for household equipment and transportation.   As a result of the subdued price increase registered in September, annual headline inflation dropped from 1.6% in August to 1.5% in September.  The core inflation index, which excludes volatile categories such as oil, fresh fruits and vegetables, increased 0.08%, which prompted a decline in the annual rate from 1.3% in August to 1.1%.  Prices, thus, seem to fall well short of the latest Central Bank projection in the MPR, which has headline inflation at 2.9% at the end of 2004 and core inflation at 1.8%.  However, it only takes monthly price increases of 0.2% for the remaining three months of the year to lift the current rate of 1.5% to 2.9%.  Consensus Forecasts expect less pressure on the price level towards the end of the year but have hiked their December 2004 inflation forecast from 2.4% expected last month to 2.6%.  For next year, the Consensus Forecast for headline inflation is a notch above the Central Bank’s 2.8% estimate.