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Economy
develops slightly better than expected in June
In June, the economy expanded 3.0% compared to the same month last year,
according to the monthly indicator for economic activity (IMACEC,
Indicator Mensual de Actividad Económica). The reading came in well ahead
of the 2.4% growth registered in May and slightly ahead of the 2.8% growth
rate that Consensus Forecast panellists had expected last month. According
to seasonally adjusted data, the Chilean economy expanded 0.26% over the
preceding month.
Second
quarter GDP growth a notch ahead of expectations but below growth in first
quarter
Due to the slightly better than expected June reading, second quarter
growth came in a notch above last month’s Consensus Forecast of 2.7%.
However, the 2.8% year-on-year growth rate observed in the second quarter
represented a slowdown when compared to the first quarter, when the
economy had expanded by 3.6%. The deceleration was most pronounced in the
external sector with domestic demand components unchanged on balance.
Robust
investment compensates weaker consumption and slump in external sector
In the second quarter, domestic demand added 3.4% over the same period
last year, unchanged from the first quarter reading, as stronger
investment offset weaker components of domestic demand. Gross fixed
investment added 4.3% in the second quarter, which was more than triple
the growth rate observed in the first quarter. The resumption of business
investment was offset by the rest of domestic demand (the Central Bank
only publishes joint data for consumption and the change in inventories),
which weakened one full percentage point from 4.1% growth in the first
quarter to 3.1% in the second. The contribution from the external sector
also fell, as exports grew 2.0% in the second quarter following on 6.1% in
the first. The impact of the quick erosion in export growth was mitigated
by imports, which also slowed from a 5.9% expansion in the first quarter
to 4.2% growth in the second.
Slowdown most pronounced in manufacturing sector
On a sectoral basis, the slowdown was most pronounced in the manufacturing
sector and in electricity, gas and water. The manufacturing industry
expanded a meagre 0.8% in the second quarter over the same quarter last
year, following on robust 6.0% growth observed in the first quarter.
According to the Central Bank, the slowdown registered in the second
quarter was mostly due to an erosion of external demand for Chilean
manufactures. Growth in electricity, gas and water also fell substantially
from 8.0% in the first quarter to 3.8% in the second. The first quarter
reading was inflated by favourable climatic conditions, which boosted the
country’s hydroelectric power plants. Gas and water actually declined in
the first half of the year. Construction added 1.3% in the second quarter,
also below the 2.0% growth in the first quarter, amid weaker housing
construction. Engineering works, on the other hand, buttressed growth, as
construction activity in mines and public transport projects actually
picked up. In the service sector, the slowdown was less pronounced, as
only financial services came in notably weaker than in the first quarter
(Q2: 2.4% growth year-on-year, Q1: 3.6% yoy). On a positive note, the
fishing sector rebounded from a 15.8% contraction in the first quarter to
a 8.3% expansion in the second quarter, as the detrimental climatic
conditions, which devastated the first quarter performance subsided.
Outlook
maintained amid lack of new impulses
With second quarter GDP growth roughly in line with expectations, the
immediate outlook remains unchanged over last month. In July, the
Consensus expects the economy to have expanded by 2.9% and third quarter
growth is seen at 3.3%. With optimism about a year-end rebound in the
global economy fading, the pickup of the Chilean economy towards the end
of the year also remains limited. According to Consensus Forecast
panellists, the economy will grow by only 3.8% in the final quarter. The
Consensus Forecast for the full year was also maintained at the same level
as last month, 3.3%.
Fiscal
balance in the red amid lower income taxes and waning tariff proceeds
In the second quarter, the central government deficit reached 269 billion
pesos (US$ 376 million), or the equivalent of 2.1% of GDP. In combination
with the first quarter surplus of 113 billion pesos (US$ 153 million), the
first half deficit was the equivalent of 0.6% of GDP or – using the
government’s method of measuring in annual GDP – 0.3% of GDP. Revenues
came in below government expectations, as the proceeds from income taxes
and tariffs dropped below planned levels. The tax take suffered from lower
company profits and from a drop in capital gains tax collection. Income
from tariffs dropped in the wake of the Free Trade Agreement with the
European Union and a unilateral reduction in tariffs, which was
implemented in January 2003. As a result, income tax collection during the
first half of the year dropped by 0.5% and foreign trade tariffs declined
by 17.4%. Higher VAT collection, which increased 3.9%, partially offset
the decline in other tax income. Copper revenues also dropped (down 4.7%
in the first half compared to the same period in 2002), as a strong surge
in second quarter proceeds from Copper Stabilization Fund withdrawals were
insufficient to compensate for the first quarter income erosion. Central
government expenditures increased 1.2% compared to the second quarter of
2002, driven by a 3.2% yoy real expansion in current expenditures and a
0.3% yoy real increase in capital expenditures.
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