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Economy
accelerates in the third quarter amid resilient domestic demand
In the
third quarter, gross domestic product (GDP) increased 4.8% over the same
period last year. The reading was up from the 4.5% expansion recorded in
the previous quarter (previously reported: +4.3% year-on-year) and also
came in slightly ahead of market expectations, which had anticipated the
economy would expand 4.7%. The acceleration over the previous period
reflected faster growth in the domestic sector. Private consumption
accelerated a notch and expanded a strong 5.8% annually (Q2: +5.7%
year-on-year), despite high interest rates and elevated inflation.
Moreover, investment soared 30.1% over the same period last year, which
was up from the already strong 24.4% expansion recorded in the second
quarter. Investment benefited from surging growth in machinery and
equipment, which expanded a staggering 49.7% over the same quarter last
year. In the external sector, exports reverted from a 1.4% annual
contraction in the second quarter to a 6.5% expansion. Imports also
accelerated, from 15.5% annual growth in the second quarter to 20.5%. As
a result, the net contribution of the external sector to overall growth
remained broadly unchanged, from -7.3 percentage points in the second
quarter to -7.5 percentage points. At the sector level, the acceleration
over the previous period was caused by faster growth in agriculture as
well as in the services sector. In contrast, industrial output slowed
from 3.2% in the second quarter to 2.9%. A quarter-on-quarter comparison
does not corroborate the acceleration suggested by the annual figures.
According to seasonally adjusted figures, the economy contracted 0.06%
over the previous quarter, which contrasted the 1.79% expansion registered
in the second quarter.
Central
Bank cuts growth forecast for 2009
Although
economic activity continues to show signs of strength in the second half
of the year, growth prospects for 2009 are deteriorating further, as the
Chilean economy is likely to suffer the effects of the severe global
downturn expected for next year, mainly through the trade channel.
Exports will experience a sharp slowdown, as demand for commodities is
likely to fall as a result of the global downturn, dragging down both
volume and prices. And with exports accounting for around 40% of total
gross domestic product, a significant slump in exports will severely
affect overall economic growth. Copper prices continue to moderate,
declining for the fifth consecutive month in November. By the end of the
month, copper prices reached US$ 3,581 per tonne (equivalent to US$ 1.62
per pound), which is down 10.3% over October and marks the lowest level in
over three years. At the current level, copper prices are 48.5% lower
than in the same month last year.
Given the
latest developments, the Chilean Copper Commission (Cochilco,
Comisión Chilena del Cobre), a government-run research group, recently
revised its price forecasts for this year and next. Cochilco now
expects copper prices to average between US$ 3.15 and US$ 3.20 per pound
this year (previously estimated: US$ 3.70 per pound). For 2009,
Cochilco slashed its projection and now expect copper prices to
average US$ 1.60 per pound (less than half the previous US$ 3.40 per pound
estimate). In the same vein, the Central Bank currently forecasts copper
prices to average US$ 1.65 per pound next year.
Against
this backdrop, export growth is set to moderate already this year, with
Consensus Forecast participants currently forecasting exports to increase
5.6% over last year. For 2009, the panel is expecting exports to contract
16.6% annually, which would constitute the worst result in over two
decades. That said, large savings accumulated in the
Economic and Social Stabilisation Fund (FEES, Fondo de
Estabilización Económica y Social)
during the past commodity cycle should help support public finances. By
the end of October, the Fund was worth US$ 18.8 billion. Meanwhile, the
domestic side of the economy is unable to pick up the slack from faltering
exports, as the lagged effect of high interest rates and tighter credit
conditions will cause consumption and, in particular, investment to
decelerate sharply next year. Indicators from the domestic sector
corroborate the deteriorating outlook for the coming months. In October,
the consumer confidence index (IPEC, Índice de Percepción de la
Economía) inched down from 34.6 points in September to 34.5, thus
remaining well below the 50-point threshold that separates optimistic and
pessimistic territory. Moreover, the October business confidence index (ICME,
Indicador Mensual de Confianza Empresarial) plummeted 8.9 points to
42.2, which marks a new historic low, signalling that investment will
likely moderate in the coming quarters.
Against
this backdrop, on 23 November the Central Bank revised its growth forecast down and now
anticipates the economy will expand between 2.0% and 3.0% in 2009 (down
from its previous 3.5% to 4.5% estimate). Consensus Forecast panellists
expect GDP growth to reach 4.1% this year, which is unchanged from last
month’s forecast. For 2009, the panel share the Central Bank’s view and
expects the economy to expand 2.4%, which is 0.4 percentage points below
last month’s forecast.
Central
Bank maintains rates unchanged despite high inflation
In
October, consumer prices added 0.88% over the previous month, which was
down from the 1.07% price rise registered in September. Nevertheless, the
reading came in above market expectations, which had anticipated prices
increasing 0.60% over the preceding month. The price rise was
broad-based, with all the categories composing the index registering
higher prices than in September. That said, higher food prices, which
added 1.6% over the previous month, were the main driver of the monthly
price rise. As a result of the monthly reading, annual headline inflation
rebounded from 9.2% in September to 9.9%, after having declined for two
consecutive months. The current rate marks the highest inflation since
September 1994. The core inflation index, which excludes volatile
categories such as oil, fresh fruits and vegetables, added a more moderate
0.64% over the previous month. Nevertheless, annual core inflation rose
from 8.8% in September to 9.3%. 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 next year. On 13 November, the Bank decided to maintain
the benchmark interest rate unchanged for the second consecutive month at
8.25%, in a decision that was largely expected by the market. Monetary
authorities argued that although inflation remains high, the current
global financial crisis will slow economic growth which, in turn, should
curb price pressures next year. In the same vein, Central Bank President,
José de Gregorio, stated that future monetary policy moves will largely
depend on the developments in the global financial markets. He added that
although inflationary pressures were easing amid lower international
commodity prices, the weaker currency may offset some of the moderating
effects on domestic prices. The Central Bank maintains its medium-term
inflation target of 3.0%, with a ±1% tolerance margin. Consensus Forecast
panellists expect inflation to moderate and end the year at 8.6%, which is
0.2 percentage points down from last month’s forecast. For 2009, the
panel anticipates inflation slowing to 4.5%.
Current
account records worst result in over a decade
In the
third quarter, the current account balance recorded a deficit of US$ 2.3
billion. The reading contrasted the US$ 368 million surplus recorded in
the third quarter of last year and came in below the US$ 1.1 billion
deficit (previously reported: US$ 1.3 billion deficit) observed in the
second quarter. The figure marks, in fact, the highest quarterly deficit
in over a decade. The deterioration of the current account balance was
caused by a sharp worsening of the trade balance, which incurred a deficit
for the first time in six years. The trade balance recorded a US$ 83
million deficit, which contrasted the US$ 2.9 billion surplus observed in
the second quarter. Exports accelerated slightly, from 0.2% in the second
quarter to 3.3%. Imports, however, outpaced exports by a wide margin and
added 43.5% over the same period last year (Q2: +44.8% year-on-year). The
strong import growth reflects a notable increase in fuel prices, which
added 69.3% over the third quarter of 2007. On the other hand, the income
balance improved notably, from a US$ 5.2 billion deficit in the second
quarter to a US$ 2.9 billion deficit. On an annual basis, the current
account reverted from a US$ 1.1 billion surplus in the second quarter to a
US$ 1.6 billion deficit. Looking forward, declining oil prices should at
least partly compensate for the effect of lower copper prices on the
export side. Consensus Forecast panellists anticipate the current account
deficit to rise further to US$ 3.9 billion by the end of the year. For
2009, the panel anticipates the current account deficit to widen to US$
6.0 billion.
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