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Despite the fact that the country remains at
the helm with regard to economic growth in Latin America, a mood of gloom
and doom continues to hold a firm grip over the Chilean business community.
As the government seeks to progress on further economic reforms, the
Argentina crisis is causing concerns, particularly in the foreign exchange
market, where the Peso continues to plummet. Meanwhile, the Central Bank
continued its monetary policy reforms. |
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Gloomy atmosphere dominates
despite positive May economic activity reading.
The sentiment in the business community remains depressed despite some
positive surprises in the May-June period. In May, the monthly indicator
for economic activity (IMACEC) increased at an annual rate of 2.4% over
the same month in 2000. The figure was slightly below the 2.6% growth
rate registered in April. In addition, May 2001 accounted for one working
day less than May 2000, which reduces growth by 0.5% to 1.0%, according to
the Central Bank. Seasonally adjusted data indicate a 0.4% growth rate in
May following the 1.2% contraction in April.
Whopping industrial
production growth reported for June.
The pick up in economic activity reflected in the moderate upside surprise
in the May GDP reading was reinforced by strong June industrial production
data. According to the National Statistical Office (INE), industrial
production increased 6.3% over June 2000. The healthy growth rate jumped
the sluggish trend prevailing in the first half of the year. In May, the
annual average growth rate had dropped to 1.0% from 1.9% in April, marking
the seventh consecutive decline. The strong June data has lifted the
average annual growth rate for the first time since October 2000.
Unemployment, on the other hand, continued to rise. In June, the
three-month moving average increased to 9.7% from 9.6% registered in May.
The persistence of rising unemployment steps up the pressure on the
government to push the labour reform project speedily through the
legislature.
Short-term upward
adjustments in growth forecasts fail to compensate for the negative
sentiment caused by Argentina crises.
The positive data readings have lifted the forecasts in the short term but
failed to inspire confidence for the remainder of the year. While the
average forecast for June economic activity rose from 3.6% expected last
month to the current 4.1% and second quarter forecasts increased from 3.1%
to 3.2%, the expectations for the remainder of the year suffered further
downward adjustments as a result of increased uncertainty over the
Argentina contagion effects. Further exacerbation of the Argentine crisis
is unlikely to have significant effects via the trade channel since
exports to Argentina accounted for barely more than 3% of total exports in
the first half this year. However, the country would suffer from a drying
up of financial flows. Although Chile enjoys the highest sovereign debt
ratings in the region and should, thus, be somewhat shielded from the
worst of the spill-over effects, the country would certainly feel the
contagion via reduced capital flows. Financial crises in the past have
proven to affect every country that bears the emerging market stamp
regardless of its macroeconomic stability and structural soundness. These
considerations and the continued uncertainty about a recovery of the
global economy have prompted panelists to adjust growth forecasts for 2001
and 2002.
Drop in headline inflation
prompts convergence with core inflation towards the centre of the Central
Bank’s inflation target range.
In July, consumer prices dropped 0.19% over June. Rather than being a
sign of subdued domestic demand, the deflationary bout was attributable to
falling oil prices. As a result, transportation costs, which dropped
1.1%, accounted for the lion share in the price decline. However, with
the exception of health sector prices, other categories included in the
consumer price index also either showed no increase or declined
moderately. The price drop reported for July prompted a steep decline in
the annual inflation rate from 3.6% in June to 3.2% in July. The core
inflation index, which excludes fuels and fresh food items, increased
0.30% in July and thus actually lifted the more relevant annual core
inflation rate from 2.7% in June to 3.1% in July. While the Central Bank
remains committed to its inflation target of 3.0% at the end of 2001,
panellists are less optimistic and see the year-end inflation rate
higher.
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