Chile - Economic Briefing December 2004

  Copper Recovers Growth Story (continued)

Outlook lifted amid better than expected development in the third quarter
The better-than-expected third quarter reading prompted Consensus Forecast panellists to raise their forecasts yet again despite persistently high unemployment.  For the full year, Consensus Forecast participants have lifted their 5.1% forecast from last month to the current 5.4%.  The current Consensus is thus still short of the latest government estimate, which in early December was revised from the 5.5% forecast to a range of 5.5% to 6.0%.  Moreover, the economy is anticipated to keep up the pace next year, with growth expected at 5.0%, which is 0.2 percentage points above last month’s forecast. 

Inflation rises amid higher food prices but Central Bank decides to maintain interests unchanged
In November, consumer prices increased 0.26%, which was just a notch above market expectations of 0.21% and in line with the 0.29% increase observed in October.  Higher food prices accounted for the lion share of the November price increase, which was partly offset by lower housing prices.   As a result of the November reading, annual headline inflation increased from 1.9% in October to 2.5%.  The core inflation index, which excludes volatile categories such as oil, fresh fruits and vegetables, increased 0.23% (October -0.01%), which prompted the annual rate to rise from 0.9% in October to 1.4%.  Price increases, however, still seem to be well short of the latest Central Bank projections, which have headline inflation at 2.9% at the end of 2004 and core inflation at 1.8%.  However, even stable prices (+0.04% or above) in December would lift the rate to 2.9%.  The Consensus Forecast for this year is in line with the Central Bank’s estimate.  For next year, the Consensus Forecast for headline inflation is seen at 2.9%, which is just a notch above the Central Bank’s 2.8% estimate.  The Consensus expects that the Central Bank will have to tighten monetary policy to maintain inflation close to the 3.0% central target rate amid surging domestic demand.  However, while a majority of analysts expected the Bank to raise interest rates in its monetary policy meeting on 9 December, the Central Bank decided to leave its policy rate unchanged at 2.25%, claiming that inflation is on track despite the acceleration in economic activity.

Current account surplus rises amid strong copper exports
In the third quarter, the current account balance incurred a surplus of US$ 207 million.  The surplus reverted the US$ 381 million deficit registered in the third quarter last year but remained significantly below the US$ 1.2 billion surplus observed in the second quarter.  The improvement in the current account balance over the same period last year was mainly due to a higher trade surplus, which more than tripled from US$ 500 million in the third quarter of 2003 to US$ 1.9 billion in the third quarter of 2004.  The higher trade surplus, in turn, reflects a massive increase in exports (+56.9% year-on-year), in the wake of the strong rise in both volumes and prices of copper, spurred by strong demand from China.  In the third quarter, copper prices exceeded last year’s levels by 62.5%.  Imports also grew at a fast, albeit more moderate 33.3% pace.  The capital account balance registered a surplus of US$ 283 million, virtually unchanged from the US$ 274 million observed in the third quarter last year.  On an annual basis, the current account surplus advanced from US$ 1.4 billion in the second quarter to US$ 2.0 billion in the third.  Consensus Forecast panellists expect the current trend of higher surpluses to remain intact and see the current account surplus growing to US$ 2.4 billion by the end of the year.  In 2005, however, the surplus will be cut in half, as resilient domestic demand will fuel import growth, while the potential for further export growth seems more limited.