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Economic
activity rebounds in April
In April,
economic activity increased 4.8% over the same month last year, according
to the monthly indicator for economic activity (IMACEC, Indicador
Mensual de Actividad Económica). The reading was well above the 0.3%
expansion recorded in March and also came in ahead of market expectations,
which had anticipated economic activity increasing 3.5% annually. The
reading, however, was positively affected by the fact that April had two
more working days than in the same month last year, as the Easter holidays
fell in April in 2007. Nevertheless, a month-on-month comparison
corroborates the acceleration suggested by the annual figures. According
to seasonally adjusted data, the economy expanded 0.56% over the previous
month, a strong rebound compared to the 0.17% decline registered in
March. Despite the strong April reading, the annual average growth rate
dropped from 4.3% in March to 4.1%, which is the lowest pace in four
years.
Economic
indicators continue to point downwards
Various
indicators continue to point to a weakening economy in the first half of
the year. In May, industrial production declined 2.4% over the same month
last year, in what constitutes the second annual contraction in the last
three months. In addition, unemployment continues to rise, reaching 8.0%
in the April-June quarter, which is 1.3 percentage points higher than in
the same period last year. Additional indicators from the domestic side
of the economy show mixed results but overall point towards unfavourable
perspectives in the coming months. In May, consumer sentiment
deteriorated again, with the consumer confidence index (IPEC, Índice de
Percepción de la Economía) dropping from 38.9 points in April to 36.5
points. Thus, the index drops further below the 50-point threshold that
separates optimism from pessimism. Moreover, the May reading marks the
lowest level in over five years. Meanwhile, the May business confidence
index (ICME, Indicador Mensual de Confianza Empresarial) improved
slightly, rising from 53.0 points in April to 53.5. Although the index
remains above the 50-point threshold that marks the dividing line between
optimism and pessimism, the indicator continues to hover around 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 June, copper prices rose 8.3% over
the previous month, reaching US$ 8,776 per tonne (equivalent to US$ 3.98
per pound) by the end of the month. Moving annual average copper prices
reached US$ 3.53 per pound at the end of May, 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, estimates copper prices to average US$ 3.10
per pound this year. Nevertheless, the current high copper prices are
mainly caused by numerous labour problems, not only in Chile but also in
Peru and Mexico, which are slowing production and thus limiting the
profits obtained by the higher prices. In fact, in May, copper exports
contracted by a third compared to the same month last year amid production
disruptions. Consequently, export growth is expected to moderate
significantly this year, with Consensus Forecast panellists currently
anticipating exports to expand 9.2% in the full year, which would
constitute the slowest pace since 2002. The Central Bank anticipates GDP
to grow between 4.0% and 5.0% this year. Consensus Forecast panellists
share the Bank’s view and expect GDP growth to reach 4.0% this year, which
is 0.1 percentage points down from last month’s forecast. For 2009, the
panel expects the economy to accelerate to 4.6%.
Central
Bank lifts interest rates as inflation continues to escalate
In June,
consumer prices rose 1.49% over the previous month, which was up from the
1.15% price increase registered in May. In addition, the reading came in
above market expectations, which had anticipated prices would increase
1.20% over the previous month. The price rise was broad-based, but was
mainly caused by higher prices for food, which added 2.3% over the
previous month, as well as for transport (+3.6% month-on-month). As a
result of the June reading, annual headline inflation jumped from 8.9% in
May to 9.5%, which is the highest rate since September 1994. The core
inflation index, which excludes volatile categories such as oil, fresh
fruits and vegetables, added a more moderate 0.76% over the preceding
month. Nevertheless, annual core inflation increased from 8.4% in May to
8.7%. Owing to the soaring inflation figures observed during the past
months, on 10 June, the Central Bank lifted the benchmark interest rate by
50 basis points to 6.75%, which is the highest rate in over eight years.
Furthermore, before the publication of the June inflation data, Central
Bank President José de Gregorio already stated that the inflation outlook
had worsened, fuelling speculation that monetary authorities will raise
interest rates further at their next policy meeting on 10 July. The
Central Bank maintains a 3.0% medium-term inflation target, with a ±1%
tolerance margin. Consensus Forecast panellists continue to raise their
forecasts and now expect inflation to end the year at 5.9%, which is 1.1
percentage points up from last month’s forecast. For 2009, the panel
anticipates inflation to slow to 3.8%.
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