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In the December elections, the right-wing
opposition party Independent Democratic Union (UDI, Unión Demócrata
Independiente) emerged as the true winner, confirming the strengthening
trend observed in past elections. In order to revive popular support for his
centre-left coalition President Ricardo Lagos reshuffled his cabinet. With
unemployment at the focus of the electorate, this year is unlikely to make
Lagos’ task easier as the economic outlook continues to deteriorate.
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October economic activity
in line with expectations
In October, the monthly indicator for economic
activity (IMACEC) was up by 2.9% over the same month in 2000, half a
percentage point above the 2.4% expansion registered in September. The
October reading was in line with market expectations, as strong industrial
sales data released earlier had indicated an uptick in economic growth.
Nevertheless, the October result was partially inflated by an extra
working day compared to October 2000, which typically accounts for 0.5 to
1.0% in additional growth. According to seasonally adjusted data,
economic activity declined 0.6% over the prior month, down from the 1.1%
expansion in September.
Unemployment drops strongly
in November but industry surprises on the downside
Data releases for November provided ambiguous
signs about the course of the economy in the final two months of the
year. On the one hand, unemployment came in considerably better than
expected by the market. National open unemployment dropped from 9.7% in
the moving quarter up to October to 8.9% in November, compared to 9.2%
expected by the Consensus Forecast panellists. The reduction in
unemployment can be explained by increased government efforts to absorb
jobless in the secondary labour market and seasonal hiring in the
agricultural sector. However, the decline in unemployment is unlikely to
continue for long as the effect of seasonal factors subsides. In fact,
panellists see unemployment increasing in March after bottoming out
in February.
Outlook for economic growth
lowered again
On the other hand, industrial production and
sales data surprised to the downside. Industrial output growth picked up
from 1.5% in October to 2.3% in November but remained below expectations.
Moreover, the National Statistical Institute (INE) reports that industrial
sales data plummeted from the strong double-digit growth registered in
October to 4.4%. As a result, panellists expect just 1.8% economic growth
in November. While December growth is still seen at a more robust annual
3.7% rate, the forecast for growth in 2001 was revised downward 0.2
percentage points to 3.1%. The outlook for this year remains highly
uncertain as reflected in the broad spectrum of forecasts, which range
from 2.5% at the lower end to 4.7% at the upper end of the spectrum.
Pessimists argue that the subdued global environment will contain demand
for Chilean manufactures. In addition, commodity prices are seen to
remain under pressure and thus keep mining sector growth in check.
Optimists, on the other hand, believe that a strong global economic
rebound in the second half of 2002 will boost for the country’s external
sector and commodity prices strongly. The Consensus growth figure dropped
a 0.1 percentage point since last month and is now in line with the
recently revised government projections.
Consumer prices fall in
December – annual inflation continues dropping
In December, consumer prices dropped 0.3% over
the previous month, the fourth deflationary bout observed this year. The
price declines affected most sectors monitored by INE and excluded only
the health and the education/recreation sectors, which experienced
increases of 0.1% and 0.4% respectively. The broad based price decline
reflects sluggish consumer demand and may presage somewhat weaker economic
activity in December than expected. Because of the unexpected price
decline, annual headline inflation dropped from 3.1% in November to 2.6%
in December. The core inflation index, which excludes fuels as well as
fresh fruits and vegetables, remained unchanged in December. As a result,
annual core inflation dropped 0.5 percentage points from 3.7% in November
to 3.2% in December. Panellists continue to factor the more benign
inflationary environment into their forecasts and have lowered their
estimates for year-end headline inflation by 0.3 percentage points, as
subdued domestic demand should assist the Central Bank in keeping
inflation in check in 2002.
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