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Economic
activity accelerates more than expected
In June,
economic activity increased 5.0% 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 2.1%
expansion recorded in May and also beat market expectations, which had
anticipated economic activity increasing 3.7% annually. Based on the
monthly data, economic growth reached 3.9% in the second quarter, which is
above the 3.0% recorded in the first quarter. A month-on-month comparison
corroborates the acceleration suggested by the annual figures. According
to seasonally adjusted data, the economy expanded 1.41% over the previous
month, up from the 0.37% expansion recorded in May. Nevertheless, despite
the stronger monthly reading, the annual average growth rate inched down
from 3.8% in May to 3.7%.
Government
revises growth forecast down
Although
preliminary figures show that the economy accelerated in the second
quarter, the pace of economic activity remains subdued as shown by several
indicators in the domestic sector. In June, industrial output contracted
for the third time in four months. As a result, in the second quarter,
industrial production expanded a meagre 0.4% over the same period last
year, which constitutes the slowest growth rate in six years. Moreover,
unemployment continues to rise and reached 8.4% in the April-June period,
which is 1.5 percentage points higher than in the same period last year
and marks, in fact, the highest rate in almost two years. In addition,
confidence indicators corroborate a negative outlook for the coming
months. In June, consumer sentiment deteriorated for the sixth
consecutive month, with the consumer confidence index (IPEC, Índice de
Percepción de la Economía) dropping from 36.5 points in May to 33.4
points. Thus, the index dropped further below the 50-point threshold that
separates optimism from pessimism. Moreover, the June reading marks the
lowest level since the index was created in 2002. The June business
confidence index (ICME, Indicador Mensual de Confianza Empresarial)
dropped from 53.5 points in May to 49.6, thus crossing into pessimistic
territory for the first time since the index was published in 2003.
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 July, copper prices declined 5.9% over the previous month,
reaching US$ 8,261 per tonne (equivalent to US$ 3.75 per pound) by the end
of the month. Moving annual average copper prices reached US$ 3.55 per
pound at the end of July, which is in line with the Central Bank’s
recently upwardly revised US$ 3.56 per pound estimate for this year.
The
Chilean Copper Commission (Cochilco, Comisión Chilena del Cobre),
a government-run research group, estimates copper prices to reach US$ 3.70
this year (recently revised upwards from the previously estimated US$ 3.10
per pound). For 2009, Cochilco expects copper prices to average
US$ 3.40 per pound (previously estimated: US$ 2.70 per pound).
Cochilco cited a weak dollar as well as lower than expected copper
output as the main reasons for the upward revision to prices.
Nevertheless, in spite of the high copper prices, copper exports
contracted 4.8% annually in the second quarter as a result of production
disruptions amid several labour conflicts. Consequently, total exports
moderated notably in the second quarter of the year, increasing a weak
4.3% annually (Q1: +15.7% year-on-year). Given the negative economic
developments, the government recently cut its GDP growth forecast for this
year from the previous 5.3% estimate to 4.1%. Similarly, the Central Bank
expects economic growth to be at the lower end of a 4.0% to 5.0% forecast
range. Consensus Forecast panellists share the authorities’ view and
expect GDP growth to reach 4.0% this year, which is unchanged from last
month’s forecast. For 2009, the panel expects the economy to accelerate
to 4.3%.
Central
Bank raises interest rates to nine-year high
In July,
consumer prices increased 1.13% over the previous month, which was down
from the 1.49% price rise registered in June. Nevertheless, the reading
came in above market expectations, which had anticipated prices adding
0.80% over the previous month. The price rise was broad-based, but was
mainly caused by higher prices for food as well as for housing, with both
categories rising 1.4% over the preceding month. Despite the pronounced
monthly increase, annual headline inflation remained unchanged at June’s
9.5%, which constitutes the highest level since September 1994. The core
inflation index, which excludes volatile categories such as oil, fresh
fruits and vegetables, added 1.09% over the previous month. As a result,
annual core inflation increased from 8.7% in June to 9.0%. Owing to
accelerating inflation during the past months, on 10 July, the Central
Bank lifted the benchmark interest rate by 50 basis points to 7.25%. The
move, which was widely expected by the market, brings the benchmark rate
to the highest level in nine years. In addition, monetary authorities
signalled that further rate hikes may be necessary in order to curtail
price pressures. Central Bank President, José de Gregorio, stated that
the current monetary tightening cycle was necessary in order to reinforce
the Bank’s credibility and achieve the 3.0% medium-term inflation target.
Consensus Forecast panellists continue to raise their forecasts and now
expect inflation to end the year at 6.8%, which is 0.9 percentage points
up from last month’s forecast. For 2009, the panel anticipates inflation
to slow to 4.2%.
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