Chile - Economic Briefing November 2004

Government Wins Municipal Elections

The governing Concertación coalition that has ruled the country since the return to democracy emerged as the winner in the 31 October nationwide municipal elections.  The government was favoured by the current strong upswing in the economy, which has been boosted by copper prices last seen 15 years ago.  However, stubbornly high unemployment that is offsetting a more resilient recovery of private consumption does not appear to have benefited the opposition.

Economy registers strong surge at the end of third quarter
The Chilean economy remains poised to live up to its growth potential this year.  In September, the economy expanded 7.7% compared to the same month last year, according to the monthly indicator for economic activity (IMACEC, Indicador Mensual de Actividad Económica).  The result was well above last month’s Consensus Forecast, which had the economy growing by 6.1% and was virtually unchanged compared to the growth rate observed in August (+7.4% year-on-year).  A month-on-month comparison corroborates the continued robustness suggested by the annual figure.  According to seasonally adjusted data, the economy expanded 1.1% over the preceding month, twice the pace observed in August.  As a result of the strong reading, the annual average growth rate inched upwards another notch from 4.7% in August to 4.9% in September, the eighth consecutive increase that confirms the consolidation of the higher growth trend observed in the past months.  According to the preliminary data set, third quarter growth came in at 6.5%.  Detailed third quarter data for national accounts will be released on 23 November.  

Industrial sector accelerates at fastest pace in more than ten years
The boost registered at the end of the third quarter was particularly pronounced in the industrial sector.  In September, industrial production increased 12.0% over the same month last year, which was even above the very robust 9.0% growth observed in August.  The September reading marked the fastest pace observed since 1992, not least since the recent adjustment in the base year from 1989 to 2002 results in higher growth rates.  In addition, the strong growth is partly due to an extra day worked in September this year compared to September 2003.  Nevertheless, the annual average growth rate advanced from 5.8% in August to 6.3% in September, consistent with the accelerating trend observed over the past months.  The improvement over August was due to much higher non-durable consumer goods growth and slightly faster growth in intermediate goods output.  Durable consumer goods and capital goods, in contrast, deteriorated compared to August and actually contracted over the same month last year.

Unemployment shows incipient signs of recovery
The resilient development in industrial production and the economy as a whole once again stood out against a rather dismal development in employment.  In the third quarter, unemployment reached 9.7%, 0.3 percentage points above the rate registered in the same period last year and disappointingly close to the 10%-threshold.  That said, unemployment is showing incipient signs of improvement.  For the first time this year, the unemployment rate dropped over the preceding month.  In the third quarter, unemployment was 0.2 percentage points below the rate observed in the moving quarter up to August.  Moreover, the drop in the unemployment rate reflects an increasing number of jobs generated, which jumped from a low of 24,000 in the quarter up to July to 107,000 in the third quarter.  In the coming months, seasonal hiring will kick in and will help to further reduce the unemployment rate.  Consensus Forecast panellists expect unemployment to drop to 8.1% by the end of the year, which would be half a percentage point above last year.

Outlook lifted amid better than expected development in the third quarter
The better-than-expected third quarter reading has prompted Consensus Forecast panellists to raise their forecasts yet again despite persistently high unemployment.  Consensus Forecast participants expect that the economy will lose some steam in the final quarter but still anticipate robust 5.3% growth.  For the full year, Consensus Forecast participants have lifted their already optimistic 5.0% forecast from last month to the current 5.1%.  In 2005, the economy is anticipated to keep up the pace, with growth expected at 4.8%, which is a notch below last month’s forecast.  The current Consensus is thus in the centre of the latest Central Bank forecast of 4.5% to 5.5%.