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Economy
accelerates a notch in the fourth quarter
In the
fourth quarter, gross domestic product (GDP) increased 4.0% over the same
period the previous year. The reading was a notch above the 3.9%
expansion registered in the third quarter (previously reported: +4.1%
year-on-year), but came in below market expectations, which had
anticipated the economy would grow 4.2%. The acceleration over the
previous quarter reflected a pick-up in domestic demand. While private
consumption virtually maintained the third quarter’s pace and expanded
7.4% annually (Q3 2007: +7.2% yoy), investment increased a strong 16.9%,
almost doubling the 8.0% growth registered in the previous quarter.
Robust domestic demand was sufficient to offset a deterioration in the
contribution of the external sector to overall growth. Exports
accelerated from 4.2% annual growth in the third quarter to 7.3%, owing to
a strong rebound in copper exports, which grew 11.1% in the final quarter
of the year, after having contracted 2.2% in the previous quarter.
Nevertheless, export growth continued to be outpaced by imports, which
increased 18.0% annually (Q3 2007: +13.5% yoy). At the sector level,
growth in the fourth quarter was mainly driven by a strong rebound in the
agriculture sector, which expanded 4.4% over the same period the previous
year (Q3 2007: -2.2% yoy). In addition, services accelerated slightly,
from 5.3% in the third quarter to 5.6%. On the other hand, growth in the
industrial sector deteriorated further, expanding a paltry 0.4% annually
(Q3 2007: +0.7% yoy). A quarter-on-quarter comparison corroborates the
acceleration suggested by the annual figures. According to seasonally
adjusted figures, the economy increased 0.91% over the previous quarter,
which contrasted the 0.68% contraction registered in the third quarter.
In the full year 2007, the economy expanded 5.1%, which was up from the
revised 4.3% growth registered in 2006.
Outlook
continues to point downwards
The
outlook continues to deteriorate, as export growth will moderate notably,
while domestic demand suffers the effects of high interest rates. In
addition, on the domestic side of the economy, unemployment remains
stubbornly high despite solid economic growth, reaching 7.3% in the
November-February quarter, which is 0.1% higher than in the previous
quarter and 0.9% higher than in the same period the previous year. Recent
indicators corroborate a less bright picture for the coming months. In
February, consumer sentiment deteriorated again, with the consumer
confidence index (IPEC) declining from 44.9 points in January to 43.7
points. Thus, the index drops further below the 50-point threshold that
separates optimism from pessimism. The decline in consumer confidence was
mainly caused by deteriorating perceptions about the state of the country
within the next year. Meanwhile, prices for copper, which accounts for
more than half of total exports, will continue to be decisive for the
performance of the external sector. In March, copper prices remained
practically unchanged (-0.2% over the previous month), reaching US$ 8,520
per tonne (equivalent to US$ 3.87 per pound) by the end of the month.
Moving annual average copper prices reached US$ 3.44 per pound at the end
of March, which is well above the Central Bank’s US$ 2.95 per pound
estimate for this year.
The Chilean
Copper Commission (Cochilco, Comisión Chilena del Cobre), a
government-run research group, is more optimistic and estimates copper
prices to average US$ 3.10 per pound this year. However, for 2009,
Cochilco anticipates average copper prices to moderate to US$ 2.70.
The reasons for the strong increase in copper prices so far this year are
diverse and include stronger demand from emerging markets, mainly China,
the weakness of the US$ and the volatility that dominates global stock
markets, which has driven investors to seek commodities as reserve
assets. Nevertheless, despite the high copper prices, export growth is
expected to moderate significantly this year, owing to slowing global
demand and the strength of the peso, which recently reached the
highest level in over ten years versus the US$. Consensus Forecast
panellists currently forecast exports to expand 5.2% over last year, after
export growth reached 15.7% in 2007. The Central Bank anticipates the
economy will expand between 4.5% and 5.5% this year. Consensus Forecast
panellists are less optimistic and expect GDP growth to reach 4.3% this
year, which is 0.3 percentage points down from last month’s forecast. For
2009, the panel expects the economy to accelerate to 4.8%.
Inflation
continues to soar, reaching twelve-year high
In March,
consumer prices rose 0.83% over the previous month, which more than
doubled the 0.40% price increase registered in February. Nevertheless,
the reading came in below market expectations, which had anticipated
prices would rise a more pronounced 1.10% over the previous month. Strong
increases in food as well as in education and recreation prices were the
main drivers behind the monthly price rise. In contrast, transport as
well as housing prices fell over the preceding month. As a result of the
pronounced price increase registered in March, annual headline inflation
rose from 8.1% in February to 8.5%, which constitutes the highest
inflation rate since June 1996. The core inflation index, which excludes
volatile categories such as oil and fresh fruits and vegetables, added
0.84% over the previous month. As a result, annual core inflation jumped
from 7.0% in February to 7.7%. A government spokesman recently stated
that authorities are committed to fight inflation, as rising food and oil
prices are strongly affecting workers, in particular those with lower
salaries. Despite the persistent rise in inflation in the past months,
the Central Bank is expected to leave interest rates unchanged at its next
policy meeting on 10 April, as monetary authorities expect price pressures
to subdue owing to the strength of the peso and the tax cut on
fuels recently approved by the government. The benchmark interest rate is
currently at a six-year high of 6.25%. Consensus Forecast panellists
expect inflation to moderate significantly and end the year at 4.4%, which
is 0.2 percentage points up from last month’s forecast. For 2009, the
panel anticipates inflation slowing further to 3.3%.
Peso reaches highest level in over a decade
In March, the
exchange rate appreciated 4.3% in nominal terms over the previous month to
reach 439 pesos to the US$, which is the highest level observed
since December 1997. The March appreciation continues the trend observed
during the last months, in which the peso has consistently
strengthened against the US$. As a result, by the end of March, the
peso was trading 22.8% higher than in the same month last year.
The
peso has been helped by record trade surpluses in the wake of
increasing copper prices, and by the rising differential in interest rates
with the United States. In recent months, the U.S. Federal Reserve has
been lowering interest rates sharply in order to prevent the U.S. economy
from falling into a recession. Chilean monetary authorities, in contrast,
have lifted rates four times since the middle of 2007 in order to contain
soaring inflationary pressures. Moreover, speculation that the
persistently high inflation figures may force the Central Bank to further
tighten monetary policy will probably continue to cause the currency to
strengthen in the coming months. Central Bank President, José de
Gregorio, recently stated that monetary authorities were monitoring the
exchange rate, but they would not intervene to combat the fast
appreciation of the peso for the time being, given the current
economic conditions.
Consensus
Forecast participants expect the currency to depreciate again by the end
of the year, with the exchange rate reaching 480 pesos to the US$.
For 2009, panellists anticipate the exchange rate to depreciate further to
513 pesos to the US$ by year-end.
Current
account surplus reaches historic high in 2007
In the
fourth quarter, the current account recorded a surplus of US$ 702
million. The figure was almost half the US$ 1.4 billion surplus recorded
in the fourth quarter of 2006 but came in above the US$ 369 million
surplus registered in the previous quarter (previously reported: US$ 330
million surplus). A decline in the income balance deficit was the main
reason behind the improvement of the current account balance over the
preceding quarter. The income balance deficit fell notably from US$ 5.0
billion in the third quarter to US$ 3.7 billion. On the other hand, the
trade balance surplus declined from US$ 4.8 billion in the third quarter
to US$ 3.9 billion, as imports outpaced exports. Exports accelerated
strongly, from 5.0% annual growth in the third quarter to 18.2%
year-on-year. However, imports expanded at almost twice that speed, and
increased 35.0% annually (Q3 2007: +22.5% yoy). On an annual basis, the
current account surplus reached US$ 7.2 billion for the full year 2007,
which represents 4.2% of GDP. This constitutes the highest surplus in
over 15 years in absolute terms. Consensus Forecast panellists expect the
current account surplus declining notably to US$ 4.1 billion by the end of
this year. For 2009, the panel anticipates the current account surplus to
fall further to US$ 3.2 billion.
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