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Economic
activity decelerates notably
In March,
economic activity increased a meagre 0.7% over the same month last year,
according to the monthly indicator for economic activity (IMACEC,
Indicador Mensual de Actividad Económica). The reading was only a
fraction of the 5.6% expansion registered in February and also came in
well below market expectations, which had anticipated economic activity
increasing 2.8% annually. Based on the monthly data, economic growth
reached 3.1% in the first quarter, which is below the 4.0% recorded in the
last quarter of 2007. A month-on-month comparison corroborates the
deceleration suggested by the annual data. According to seasonally
adjusted figures, the economy increased 0.12% over the previous month,
which was well down from the 0.91% expansion registered in February. As a
result of the weak March reading, the annual average growth rate fell from
4.9% in February to 4.3%, which is the lowest pace in over a year.
Economic
outlook remains subdued
The
economy continues to show signs of weakness, with preliminary figures
showing that economic activity expanded a disappointing 3.1% annually in
the first quarter, which is the lowest pace in over three years. In
addition, the outlook for this year continues to be subdued, as export
growth should moderate, while domestic demand will suffer from high
interest rates. In addition, on the domestic side of the economy,
unemployment remains stubbornly high despite solid economic growth. In
the January-March quarter, unemployment reached 7.6%, which is 0.3% higher
than in the previous quarter and 1.1% higher than in the same period last
year. Recent indicators from the domestic side of the economy corroborate
a negative outlook for the coming months. In March, consumer sentiment
deteriorated again, with the consumer confidence index (IPEC) dropping
from 43.7 points in February to 41.4 points. Thus, the index drops
further below the 50-point threshold that separates optimism from
pessimism. Moreover, the March reading marks the lowest level in nearly
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 April, copper prices rose 1.6% over the previous
month, reaching US$ 8,655 per tonne (equivalent to US$ 3.93 per pound) by
the end of the month. Despite the moderation in price growth in the past
two months, at the current level, copper prices are still 10.6% higher
than in the same month last year. Moving annual average copper prices
reached US$ 3.47 per pound at the end of April, 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.
However, for 2009, Cochilco anticipates average copper prices to
moderate to US$ 2.70. Copper prices are mostly being pushed up by lower
output – which fell 8.4% annually in March – in the wake of strikes at
major mines. In spite of the high copper price, export growth is expected
to moderate significantly this year, owing to slowing global demand and
the strength of the peso. Consensus Forecast panellists currently
expect exports to increase 6.8% over last year, following on 15.7% growth
attained in 2007. Meanwhile, the Central Bank announced it will purchase
US$ 8 billion in currency to increase its international reserves level in
order to better protect the economy from the global economic turmoil. The
Bank was faced with increasing pressure from lawmakers as well as from
exporters to weaken the peso, which has appreciated almost 15%
percent nominally versus the U.S. dollar so far this year. The Central
Bank recently cut its GDP growth forecast for this year, from the previous
4.5%-5.5% estimate to a range of between 4.0% and 5.0%. Consensus
Forecast panellists share the Bank’s view and expect GDP growth to reach
4.2% this year, which is 0.1 percentage points down from last month’s
forecast. For 2009, the panel expects the economy to accelerate to 4.8%.
Inflation
moderates from record high
In April,
consumer prices increased 0.38% over the previous month, which was less
than half the 0.83% price rise registered in March. The reading was
virtually in line with market expectations, which had anticipated prices
would rise 0.40% over the previous month. Once again, a strong increase
in food prices, which added 1.3% over the previous month, was the main
driver behind the monthly price rise. On the other hand, transport prices
fell 1.7% over March. As a result of the April reading, annual headline
inflation moderated slightly, from 8.5% in March to 8.3%. The core
inflation index, which excludes volatile categories such as oil and fresh
fruits and vegetables, added 0.68% over the preceding month. As a result,
annual core inflation rose from 7.7% in March to 8.1%. Despite the strong
inflationary pressures of the past months, the Central Bank decided to
maintain the benchmark interest rate unchanged at 6.25% at its last policy
meeting on 8 May, as monetary authorities expect inflation will gradually
ease in the second half of the year. The decision was widely expected by
the market. Consensus Forecast panellists expect inflation to moderate
significantly and end the year at 4.8%, which is 0.4 percentage points up
from last month’s forecast. For 2009, the panel anticipates inflation
slowing further to 3.4%.
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