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Economy
grows faster than expected on soaring investment
In the
second quarter, gross domestic product (GDP) rose 4.3% over the same
quarter last year. The reading was up from the 3.3% expansion registered
in the previous quarter (previously reported: +3.0% year-on-year) and also
beat market expectations of 4.0% growth. The acceleration over the
previous quarter was entirely caused by stronger growth in domestic
demand. Private consumption expanded 5.9% over the same quarter last
year, up from the 5.4% seen in the previous quarter. In addition,
investment increased 22.9% annually (Q1: +16.6% yoy), causing domestic
demand to expand at the fastest pace in three years. Investment benefited
from soaring growth in machinery and equipment, which expanded a
staggering 34.4% over the same quarter last year. On a negative note, the
net contribution from the external sector to overall growth deteriorated,
as exports contracted 0.7% annually (Q1: 2.0% yoy), while imports
accelerated from 13.6% in the first quarter to 15.5%. Thus, the external
sector continues to struggle, dragged down by negative growth in copper
exports, which contracted 19.9% annually. At the sector level, the
acceleration over the previous quarter was broad-based, with all three
main economic sectors registering higher growth rates than in the previous
period. Agriculture expanded 6.9% annually, up from 3.5% growth in the
first quarter; industrial output rose 0.7% (Q1: -0.2% yoy) and finally,
the services sector accelerated from 5.0% in the first quarter to 5.3%. A
quarter-on-quarter comparison corroborates the acceleration suggested by
the annual figures. According to seasonally adjusted figures, the economy
increased 1.81% over the previous quarter, which was up from the 1.65%
expansion registered in the first quarter.
Economic
outlook remains subdued
Although
the latest data point to a recovery in economic activity in the second
half of the year, growth prospects remain subdued and the Chilean economy
is set to again expand below potential this year. Moreover, higher
inflation as well as the associated monetary tightening will probably
affect private consumption well into next year, preventing economic growth
from experiencing a full recovery. Some indicators from the domestic side
of the economy corroborate a negative outlook for the coming months. In
July, consumer sentiment deteriorated for the seventh consecutive month,
with the consumer confidence index (IPEC, Índice de Percepción de la
Economía) dropping from 33.4 points in June to 31.6 points. Thus, the
index dropped further below the 50-point threshold that separates optimism
from pessimism. Moreover, the July reading marks the lowest level in over
seven years. In addition, the July business confidence index (ICME,
Indicador Mensual de Confianza Empresarial) fell from 49.6 points in
June to 48.6, marking a new historic low. 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 August, copper
prices declined 9.1% over the previous month, reaching US$ 7,510 per tonne
(equivalent to US$ 3.41 per pound) by the end of the month. At the
current level, copper prices are 0.9% below the same month last year.
Moving annual average copper prices reached US$ 3.55 per pound at the end
of August, which is in line with the Central Bank’s 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 average US$ 3.70 this year.
Against
this backdrop, export growth is set to moderate, with Consensus Forecast
participants currently forecasting exports to increase 9.8% over last
year.
The
government expects the economy to expand 4.1% while the Central Bank
anticipates GDP to grow between 4.0% and 5.0% this year. 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 step up a notch to 4.1%.
Central
bank lifts interest rates to decade high
In August,
consumer prices rose 0.93% over the previous month, which was down from
the 1.13% price increase registered in July. In addition, the reading
came in below market expectations, which had anticipated prices adding
1.00% over the previous month. The price rise was broad-based, with all
but one of the categories composing the index registering higher prices
than in the previous month. That said, higher prices for housing as well
as for transport were the main driver behind the monthly price increase.
Despite the pronounced monthly rise, annual headline inflation declined
for the first time in seven months, from 9.5% in July to 9.3%. The core
inflation index, which excludes volatile categories such as oil, fresh
fruits and vegetables, added 0.74% over the previous month. As a result,
annual core inflation remained unchanged at July’s 9.0%. Amid the strong
inflationary pressures of the past months, on 4 September, the Central
Bank raised the benchmark interest rate for the fourth consecutive month
by 50 basis points to 8.25%, which is the highest rate in almost a
decade. Monetary authorities stated that given the current inflationary
environment the move was necessary to ensure inflation converges towards
the Bank’s 3.0% target. Furthermore, the government recently announced a
US$ 1.0 billion package of anti-inflationary measures, which includes a
temporary reduction on fuel taxes. Despite the measures, Consensus
Forecast panellists continue to raise their forecasts and now expect
inflation to end the year at 7.7%, which is 0.9 percentage points up from
last month’s forecast. For 2009, the panel anticipates inflation to slow
to 4.6%.
Current
account records first quarterly deficit in three years
In the
second quarter, the current account recorded a deficit of US$ 1.3
billion. The reading contrasted the US$ 2.4 billion surplus registered in
the second quarter of last year as well as the US$ 1.2 billion surplus
(previously reported: US$ 880 million surplus) seen in the previous
quarter. The figure marks, in fact, the first quarterly deficit since
2005. The deterioration in the current account balance was mainly caused
by a sharp reduction in the trade balance surplus, which almost halved,
falling from US$ 6.0 billion in the first quarter to US$ 3.3 billion.
Exports decelerated notably, from 16.3% annual growth in the first quarter
to 3.6%, while import growth remained robust, reaching 44.5% year-on-year
(Q1: +38.8% yoy). The strong import growth reflects a notable increase in
fuel prices, which added 69.3% of the second quarter of 2007. On an
annual basis, the current account surplus plummeted from US$ 4.6 billion
in the first quarter to US$ 956 million in the second. Consensus Forecast
panellists expect the current account surplus to rise slightly to US$ 1.0
billion by the end of this year. For 2009, the panel anticipates the
current account to record a US$ 2.2 billion deficit.
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