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Economic
activity grows less than expected in August
In August,
economic activity expanded 2.4% over the same month last year, according
to the monthly indicator for economic activity (IMACEC, Indicador
Mensual de Actividad Económica). The reading was well down from the
6.2% increase recorded in July and also came in below market expectations,
which had anticipated economic activity adding 4.4% annually. In part,
the reading was negatively affected by the fact that August this year had
two working days less than the same month last year. Nevertheless, a
month-on-month comparison corroborates the deceleration suggested by the
annual figures. According to seasonally adjusted data, the economy
contracted 0.88% over the previous month, which was down from the 0.53%
decline recorded in July. As a result of the monthly reading, the annual
average growth rate dropped a notch, from 4.0% in July to 3.9%.
Copper
prices fall most in two decades
With three
quarters of the current year behind us, growth estimates for this year are
stabilising. However, the outlook for 2009 is deteriorating rapidly as
the effects of the global financial turmoil on the Chilean economy are
being factored in. The external sector is likely to experience a notable
slowdown, as demand for commodities is likely to slump amid the global
slowdown, dragging down both volume and prices. And with exports
accounting for some 40% of GDP, a dent in exports would be felt strongly
in the entire economy. In particular copper prices are being affected
as
demand from the construction industry moderates, mainly owing to the sharp
slowdown in the United States housing market.
In
September, copper prices declined 14.5% over the previous month, reaching
US$ 6,419 per tonne (equivalent to US$ 2.91 per pound) by the end of the
month. Moreover, in the week ending 10 October copper prices plummeted
the most in two decades, falling to US$ 5,000 per tonne (equivalent to US$
2.27 per pound), which is the lowest level since March 2006. At the
current level, copper prices are 38.5% lower than on the same day a year
ago. Against this backdrop, export growth is set to moderate this year,
with Consensus Forecast participants currently forecasting exports to
increase 10.3% over last year. Furthermore, for 2009, the panel is
expecting exports to contract 3.8% annually, ending a six-year streak of
double-digit growth that more than tripled exports from US$ 18.2 billion
in 2002 to an estimated US$ 74.5 billion in 2008. The strong
deterioration of the external sector will likely cause the current account
balance to incur a deficit this year for the first time since 2003
(Consensus Forecast: -0.6% of GDP). Moreover, for 2009, Consensus
Forecast panellists are predicting the current account deficit to rise to
2.2% of GDP, which would mark the largest deficit in a decade and would
require the country to seek external financing in a period of increasing
risk aversion. Meanwhile, the monetary tightening executed by the Central
Bank will dent private consumption, preventing the domestic economy from
compensating for a weaker external sector. That said, the global credit
crisis has already prompted the Bank to stop the current monetary
tightening cycle and may even force monetary authorities to cut interest
rates in 2009, thus providing a stimulus to economic growth. In fact,
some short-term indicators from the domestic side continue to point to a
stable outlook for the coming months. In August, business confidence (ICME,
Indicador Mensual de Confianza Empresarial) increased from 48.6
points in July to 50.1 and thus just crossed over the 50 point threshold
that separates pessimism from optimism. In addition, in September,
consumer sentiment improved, with the consumer confidence index (IPEC,
Índice de Percepción de la Economía) rising from 31.7 points in August
to 34.6. However, even though the reading represents the second
consecutive improvement in consumer sentiment, the index remains very low,
suggesting that private consumption is unlikely to pick up the slack from
weaker external demand.
Outlook
for 2009 deteriorates notably as global credit crisis likely to hurt
economy
So far, no
banks have reported severe liquidity problems and the government has
repeatedly stated that the country’s financial system is solid and in a
good position to face the current crisis. However, the stock market has
been hit hard in the past weeks, losing 16.1% in the week up to 10
October, taking the accumulated loss so far this year to 25.9%. Against
this backdrop, the Central Bank announced it would inject US$ 5.0 billion
into the financial system in order to increase liquidity as well as boost
investors' confidence. In addition, monetary authorities stated that they
will monitor domestic and international financial conditions closely and
will take further measures if necessary. Not reflecting the meltdown in
global financial markets in the week up to 10 October, the
latest government forecast projects the economy to expand 4.1% while the
Central Bank anticipates GDP to grow between 4.0% and 5.0% this year. For
2009, both the government and the Central Bank anticipate the economy to
expand 4.0%. Consensus Forecast panellists share the authorities’ view
and expect GDP growth to reach 4.2% this year, which is up 0.2 percentage
points from last month’s forecast. For 2009, the panel is more cautious
than the government and continues to revise its growth forecast
downwards. Only partly reflecting the latest developments in financial
markets, the panel now expects the economy to expand 3.6%, which is 0.5
percentage points below last month’s forecast.
Inflation
moderates a notch
In
September, consumer prices increased 1.07% over the previous month, which
was up from the 0.93% price rise recorded in August. In addition, the
reading came in above market expectations, which had anticipated prices
adding 0.90% 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 August. That said, the main drivers of the monthly price
rise were higher prices for transport as well as for food. Despite the
pronounced monthly rise, annual headline inflation declined for the second
consecutive month, from 9.3% in August to 9.2%. The core inflation index,
which excludes volatile categories such as oil, fresh fruits and
vegetables, added 0.92% over the previous month. Nevertheless, annual
core inflation moderated from 9.0% in August to 8.8%, which is the first
decline in fifteen months. On 9 October, the Central Bank decided the
keep the benchmark interest rate unchanged at 8.25%. Despite the high
inflation, the current financial crisis has prompted the Central Bank to
halt the current monetary tightening cycle and may even force monetary
authorities to cut interest rates in 2009. Monetary authorities argued
that although inflation remains high, the current global financial crisis
will slow economic growth as well as curb price pressures next year. The
Central Bank maintains its medium-term inflation target of 3.0%, with a
±1% tolerance margin. Consensus Forecast panellists expect inflation to
moderate further and end the year at 8.7%, which is 1.0 percentage point
up from last month’s forecast. For 2009, the panel anticipates inflation
slowing to 4.7%.
Peso drops amid global financial crisis
In September,
the exchange rate depreciated 6.5% in nominal terms over the previous
month to reach 552.5 pesos to the US$, which is the lowest
end-of-month level observed since July 2005. The September depreciation
continues the trend observed since April. Since then, the peso has
been weakening almost uninterruptedly against the U.S. dollar. As a
result, by the end of September, the peso was trading 7.4% lower than in
the same month last year. Like most of the currencies across the region,
the Chilean peso is being hit hard by global turbulences caused by
the financial crisis in the United States, which have prompted investors
to withdraw funds from emerging markets across the globe. Moreover, the
financial turmoil is also causing a sell-off in raw materials, which in
turn is prompting copper prices to fall, further pushing down the peso.
Furthermore, by 9 October, the peso had depreciated an additional
9.0% over the end of September, taking the exchange rate to 607.2 pesos
to the US$. Consensus Forecast participants are revising their forecasts
owing to the latest developments in the financial sector, but expect the
currency to recover some ground by the end of the year, with the exchange
rate reaching 551 pesos to the US$. For 2009, panellists
anticipate the exchange rate to depreciate to 573 pesos to the US$
by year-end.
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