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Economy
expands at slowest pace since 2003
In the
first quarter, gross domestic product (GDP) increased 3.0% over the same
quarter last year. The reading was down from the 4.0% expansion
registered in the previous quarter and also came in slightly below market
expectations, which had anticipated the economy would grow 3.2%. The
reading marks, in fact, the slowest growth pace since the final quarter of
2003. The deceleration over the previous quarter was broad-based, but was
mainly caused by a deterioration of the net contribution of the external
sector to overall growth. Export growth decelerated notably, from 7.3%
annual growth in the fourth quarter to a weak 2.1%, strongly affected by
the poor performance in copper exports. Exports of copper increased a
meagre 0.5% year-on-year, as labour conflicts disrupted production, which
declined 3.6% over the same quarter last year. Imports also decelerated
but less notably, increasing 14.5% over the same month last year (Q4 2007:
+18.0% yoy). On the domestic side of the economy, both private
consumption and investment slowed over the preceding quarter. Private
consumption expanded 5.7%, down from the 7.4% growth registered in the
previous quarter, while investment remained strong, increasing 15.5%
annually (Q4 2007: +16.9% yoy). At the sector level, the deceleration
over the previous quarter was also general, but mainly driven by
plummeting growth in agriculture, which slowed from 4.4% in the fourth
quarter to 0.6%, affected by a severe drought. The industrial sector also
slowed and remained unchanged over the same quarter last year, after
having expanded 0.4% the preceding month; finally, the services sector
increased 4.6% annually (Q4 2007: +5.6% yoy). A quarter-on-quarter
comparison does not corroborate the deceleration suggested by the annual
figures. According to seasonally adjusted figures, the economy increased
1.43% over the previous quarter, which was up from the 0.84% expansion
registered in the fourth quarter.
Economy
grows below potential
Economic
activity was weak in the first quarter and the outlook for this year
remains subdued, as export growth should moderate amid the global
slowdown, while domestic demand suffers from high interest rates. In
addition, on the domestic side of the economy, unemployment remains
stagnant at high levels, reaching 7.6% in the February-April quarter,
which is 0.8% higher than the level observed in the same period last
year. Recent indicators corroborate a negative outlook for the coming
months. In April, consumer sentiment deteriorated again, with the
consumer confidence index (IPEC) dropping from 41.4 points in March to
38.9 points. Thus, the index drops further below the 50-point threshold
that separates optimism from pessimism. Moreover, the April reading marks
the lowest level in over five years. The March business confidence index
(ICME) also deteriorated, falling from 57.1 points in February to 52.2.
Although the index remains above the 50-point threshold that marks the
dividing line between optimism and pessimism, the March figure marks the
lowest level in almost two years. 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 May, copper prices fell
6.4% over the previous month, reaching US$ 8,105 per tonne (equivalent to
US$ 3.67 per pound) by the end of the month. Moving annual average copper
prices reached US$ 3.50 per pound at the end of May, 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 than the Central Bank and estimates copper prices to average
US$ 3.10 per pound this year. Nevertheless, in spite of the high copper
prices, export growth is expected to moderate significantly this year. In
the first quarter, exports increased 15.7% annually, down from the 18.2%
growth attained in the previous quarter, and Consensus Forecast panellists
expect exports to grow only 8.8% in the full year. The Central Bank
anticipates GDP to grow between 4.0% and 5.0% this year. Consensus
Forecast panellists share the Bank’s view and expect GDP growth to reach
4.1% this year, which is 0.1 percentage points down from last month’s
forecast. For 2009, the panel expects the economy to accelerate to 4.7%.
Inflation
rises to highest level in over 13 years
In May,
consumer prices increased 1.15% over the previous month, which was well up
from the 0.38% price rise registered in April. The reading also came in
above market expectations, which had anticipated prices would increase
0.70% over the previous month. The price rise was broad-based and, once
again, a strong increase in food prices, which added 1.9% over the
previous month, was the main driver behind the monthly price spike. In
addition, transport prices soared 2.7% over April. As a result of the May
reading, annual headline inflation jumped from 8.3% in April to 8.9%,
which is the highest rate since December 1994. The core inflation index,
which excludes volatile categories such as oil, fresh fruits and
vegetables, added a more moderate 0.69% over the previous month but even
so, annual core inflation rose from 8.1% in April to 8.4%. The continuous
rise in inflationary pressures may prompt the Central Bank to raise
interest rates at its next policy meeting, on 10 June. The Bank left the
benchmark interest rate unchanged at a six-year high of 6.25% at its last
policy meeting on 8 May and maintains a 3.0% inflation target for this
year. Nevertheless, Consensus Forecast panellists expect inflation to
moderate significantly and end the year at 4.8%, which is unchanged from
last month’s forecast. For 2009, the panel anticipates inflation slowing
further to 3.5%.
Current
account surplus falls notably compared to last year
In the
first quarter, the current account recorded a surplus of US$ 880 million.
The reading was less than a quarter of the US$ 3.7 billion surplus
recorded in the first quarter of 2007 but came in above the US$ 702
million surplus registered in the previous quarter. A deterioration in
both the transfer and the income balances was more than offset by a
notable improvement in the trade balance, thus resulting in the higher
current account surplus recorded in the first quarter. The trade balance
surplus rose from US$ 3.9 billion in the fourth quarter of 2007 to US$ 6.2
billion, as exports increased a strong 16.8% over the previous quarter,
while imports increased at half that pace, adding 8.2% over the final
quarter of 2007. Meanwhile, the income balance registered a US$ 5.3
billion deficit, well above the US$ 3.7 billion deficit registered in the
preceding quarter. On an annual basis, the current account surplus
dropped from US$ 7.2 billion in the fourth quarter to US$ 4.3 billion.
Consensus Forecast panellists expect the current account surplus declining
to US$ 1.7 billion by the end of this year. For 2009, the panel
anticipates the current account surplus to fall further to US$ 757
million.
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