Chile - Economic Briefing December 2004

 Copper Recovers Growth Story

This year, the Chilean economy will expand at the fastest pace since 1997.  The economy is profiting from strong demand for copper, which has boosted prices and volumes alike.   As a result, world’s largest copper producer is set for a year of solid growth, which will also carry over into next year.  The only dark spot is the persistently high unemployment that is offsetting a more resilient recovery in private consumption.

Economic growth in third quarter slightly better than expected
In the third quarter, gross domestic product (GDP) expanded by 6.8% over the same quarter last year.  The final data came in slightly ahead of the 6.5% growth based on the preliminary monthly data published last month.  The difference is mainly due to an upward revision of growth data for July from 4.5% reported earlier to 5.3%.  The third quarter growth was well ahead of the 5.3% annual growth registered in the second quarter and was in fact the fastest pace since 1997.  Moreover, seasonally adjusted data corroborate the resilience of the economy, as activity advanced 2.04% over the previous quarter.

Buoyant domestic demand accounts for acceleration in economic growth, as contribution from external sector remains stable at high level
The acceleration observed in the third quarter was mainly due to stronger domestic demand, while the external sector continued to provide the same strong contribution registered in the previous quarter.  Growth in domestic demand accelerated from a 5.4% pace in the second quarter to 8.6% in the third.  The acceleration was due largely to increased investment activity, whereas consumption and inventories – the Central Bank only publishes joint data for the quarter – accelerated from 4.7% annual growth to 6.9%.  Gross fixed investment, on the other hand, almost doubled from the already strong 7.7% pace to a 14.0% expansion in the third quarter.  The improvement was due to a further pickup in investment in machinery and equipment, which continued the accelerating trend observed since last year.  In the third quarter, investment in machinery and equipment grew by 25.1%, almost twice the 13.6% pace observed in the second quarter.  Investment in construction and other works, on the other hand, grew at a lesser pace but actually more than doubled the 3.0% second quarter expansion, as growth came in at 6.2%.  Finally, exports of goods and services added 15.3% (Q2: +9.8% year-on-year) and the pace of imports doubled to 20.5% from 10.3% in the second quarter.

Mining and manufacturing industry accelerate further in third quarter
Fishing was the fastest growing sector in the third quarter with a 14.8% expansion.  However, despite the impressive growth rate, the reading actually represents a slowdown compared to the 24.8% growth registered in the second quarter.  In fact, the third quarter acceleration in economic growth was mainly the result of faster growth in construction, manufacturing and mining.  Mining added 9.1% over the same quarter last year, following on a 6.4% expansion in the second quarter.  The sector continued to profit from solid output growth in both private and state-owned copper mines.  Strong global demand, high copper prices and the ramping up of new mining operations are behind the resilient growth of the sector.  Output of other minerals, in contrast, is actually contracting, with the notable exception of iron.  Industrial manufacturing, the most important sector of the economy, constitutes the other pillar of economic growth.  In the third quarter, industrial manufacturing accelerated from the resilient 6.1% pace observed in the second quarter to 8.8% growth in the third, led by intermediate goods and followed by consumer and export goods.  Construction added 6.5% over the same quarter last year, and thus registered the strongest acceleration in percentage points over the previous quarter, when the sector expanded a paltry 3.0% even though sub-par growth in industrial building activities offset the major dynamism in housing and commercial building.  In the service sector, commerce, restaurants and hotels stood out with a 8.1% year-on-year expansion, following on 7.8% growth in the second quarter.

Economy slows in October
In October, economic activity slowed compared to the resilient 7.7% pace observed in September but remained robust.  According to the monthly indicator for economic activity (IMACEC, Indicador Mensual de Actividad Económica), the economy expanded 5.8% in October compared to the same month last year.  The result was below the Consensus Forecast, which had anticipated the economy to grow by 6.2%.  However, a month-on-month comparison suggests an even stronger growth than indicated by the annual figure.  According to seasonally adjusted data, the economy added 0.84% over the preceding month, following on a 1.00% monthly expansion in September.  The slowdown was due to industrial production, where growth came in at 5.2% - just half the unsustainable 12.0% pace registered in September.  Moreover, unemployment dropped a paltry 0.3 percentage points to 9.4% in the moving quarter up to October compared the third quarter.