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Economic
activity beats expectations
In
September, economic activity increased 5.5% over the same month last year,
according to the monthly indicator for economic activity (IMACEC,
Indicador Mensual de Actividad Económica). The reading more than
doubled the 2.4% expansion recorded in August and also came in above
market expectations, which had anticipated economic activity would rise
5.0% annually. The reading, however, was affected by the fact that
September this year had three more working days than the same month last
year. Based on the monthly data, economic growth reached 4.7% in the
third quarter, which is above the 4.3% recorded in the second quarter. A
month-on-month comparison corroborates the acceleration suggested by the
annual figures. According to seasonally adjusted data, the economy
expanded 0.54% over the previous month, which contrasted the 0.86%
contraction recorded in August. As a result of the strong monthly
reading, annual average growth rose from 3.9% in August to 4.1%.
Copper
prices fall to lowest level in three years
Although
economic activity is recovering in the second half of the year, growth
prospects for 2009 continue to deteriorate notably, as the Chilean economy
is likely to fully suffer the effects of the current financial turmoil
next year, mainly through the external side of the economy. The external
sector will experience a notable slowdown, as demand for commodities is
likely to slump amid the global downturn, dragging down both volume and
prices. And with exports accounting for about 40% of GDP, a dent in
exports will be felt harshly throughout the entire economy. In
anticipation of reduced demand in the wake of slower global growth copper
prices have softened substantially. In October, copper prices plummeted
37.8% over the previous month, reaching US$ 3,993 per tonne (equivalent to
US$ 1.81 per pound) by the end of the month, which is the lowest level in
three years. At the current level, copper prices are 48.6% lower than in
the same month a year ago. Against this backdrop, export growth is set to
moderate this year, with Consensus Forecast participants currently
forecasting exports to increase 7.7% over last year. Furthermore, for
2009, the panel is expecting exports to contract 8.5% annually, which
would constitute the worst result in over a decade. The strong
deterioration of the external sector will also probably cause the current
account balance to incur a deficit this year for the first time since 2003
(Consensus Forecast: -1.3% of GDP). Moreover, for 2009, Consensus
Forecast panellists are predicting the current account deficit to double
to 2.6% of GDP, which would mark the largest deficit since 1998. In the
domestic side of the economy, the prevailing high interest rates will
cause consumption and investment to decelerate sharply next year,
preventing domestic demand from taking over as the main growth engine.
That said, the global credit crisis has already prompted the Central Bank
to at least temporarily end the current monetary tightening cycle and will
likely enable monetary authorities to cut interest rates in 2009, which
should provide some stimulus to economic growth. Meanwhile, following on
the US$ 850 million fiscal stimulus plan unveiled on 13 October, President
Michelle Bachelet announced a second US$ 1.15 billion stimulus plan in
order to help offset the effects of the global financial crisis. The
package is aimed at facilitating credit access to homebuyers as well as to
small and medium-sized businesses. For that purpose, the government will
inject US$ 500 million into the state-owned Banco del Estado in
order to increase mortgage lending and will spend an additional US$ 550
million on various programmes aimed at easing lending to small- and
medium-sized companies. The government projects the economy to expand
4.1% this year while the Central Bank anticipates GDP to grow between 4.0%
and 5.0%. For 2009, both the government and the Central Bank anticipate
the economy to expand 4.0%. Consensus Forecast panellists share the
authorities’ view and expect GDP growth to reach 4.1% this year, which is
down 0.1 percentage points from last month’s forecast. For 2009, the
panel is more sceptical and continues to revise its growth forecast
downwards. Currently, the panel expects the economy to expand 2.8% in
2009, which is 0.8 percentage points below last month’s forecast.
Inflation
rebounds in October to reach 14-year high
In
October, consumer prices added 0.88% over the previous month, which was
down from the 1.07% price rise registered in September. Nevertheless, the
reading came in above market expectations, which had anticipated prices
increasing 0.60% over the preceding month. The price rise was
broad-based, with all the categories composing the index registering
higher prices than in September. That said, higher food prices, which
added 1.6% over the previous month, were the main driver of the monthly
price rise. As a result of the monthly reading, annual headline inflation
rebounded from 9.2% in September to 9.9%, after having declined for two
consecutive months. The current rate marks the highest inflation since
September 1994. The core inflation index, which excludes volatile
categories such as oil, fresh fruits and vegetables, added a more moderate
0.64% over the previous month. Nevertheless, annual core inflation rose
from 8.8% in September to 9.3%. Despite the high inflation, the current
financial crisis has prompted the Central Bank to halt the current
monetary tightening cycle and may even force monetary authorities to cut
interest rates early next year. Monetary authorities argued that although
inflation remains high, the current global financial crisis will slow
economic growth which, in turn, should curb price pressures next year. In
the same vein, Central Bank President, José de Gregorio, recently stated
that future monetary policy moves will largely depend on the developments
in the global financial markets. He added that although inflationary
pressures were easing amid lower international commodity prices, the
weaker currency may offset some of the moderating effects on domestic
prices. The Central Bank maintains its medium-term inflation target of
3.0%, with a ±1% tolerance margin. Consensus Forecast panellists expect
inflation to moderate and end the year at 8.8%, which is 0.1 percentage
points up from last month’s forecast. For 2009, the panel anticipates
inflation slowing to 4.7%.
Peso
drops to five-year low
In
October, the exchange rate depreciated 16.9% in nominal terms over the
previous month to reach 665 pesos to the US$, which is the lowest
end-of-month level observed since September 2003. The October
depreciation continues the trend observed since April, in which the
peso has been weakening almost uninterruptedly against the U.S.
dollar. As a result, by the end of October, the peso was trading 25.6%
lower than in the same month last year. Like most of the currencies
across the region, the Chilean peso has been hit hard by global
turbulences caused by the financial crisis in the United States, which
have prompted investors to withdraw funds from emerging markets across the
globe. Moreover, the financial turmoil is also causing a sell-off in
commodities, which is prompting copper prices to fall, further pushing
down the peso. Consensus Forecast participants are revising their
forecasts owing to the latest developments in the financial sector, but
expect the currency to recover some ground by the end of the year, with
the exchange rate reaching 605 pesos to the US$. For 2009,
panellists anticipate the exchange rate to depreciate further to 613
pesos to the US$ by year-end.
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