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08/06/2005 | Economic Growth Picks Up Pace in Chile in April 2005

WMRC Staff

Economic activity rose by 6.3% year-on-year in April, according to the central bank's Imacec index. This compares with 5.7% in the first quarter and reflects a strong increase in industrial production.

 

Global Insight Perspective

Significance

Economic growth accelerated to 6.3% year-on-year (y/y) in April from 5.7% the previous month, largely as a result of surging industrial production, according to the central bank.

Implications

With the Chilean economy continuing to operate strongly, inflation pressures appear to be building. As such, further monetary tightening appears likely. 

Outlook

The central bank began raising interest rates in September 2004 and will probably tighten policy a further 25 basis points tomorrow. However, inflation remains under control and the economy is on track to record another year of strong expansion. Some deceleration in growth is likely in the second half of 2005 and into 2006, however.

Economic Growth Accelerates as Industrial Production Surges

There are no two ways about it: the economic activity figures for April demonstrate an acceleration from the first quarter. There was no 'Easter effect' to distort the figures, as occurred to such dramatic effect in Mexico, with this April actually having the same number of working days as April 2004. The Imacec report, which is a proxy for GDP drawing on the bulk of the data used to compile that indicator but published monthly rather than quarterly, put economic growth at 6.3% y/y in April, which is in line with market expectations and above the 5.25-6.25% expansion predicted by the central bank for 2005 as a whole, as well as the 5.7% reported in the first quarter. The seasonally adjusted series puts the increase in output in April 2005 at a strong 1.2% over the previous month.

Although the central bank does not provide a breakdown of the 'topline' Imacec figure, reports for April already in the public domain give a clear indication of where the pick-up in growth stems from:

Industrial output grew a storming 10.1% y/y in April, according to the national statistics institute. The sharp increase is partly explained by a 40% y/y increase in the production of capital goods and reflects solid domestic demand.

Although the volume of copper mined fell by 6.2% y/y, export earnings rose by 7% as a function of higher global prices for the commodity.

According to the National Chamber of Commerce, retail sales in the Metropolitan Region of Santiago rose 7.2% y/y in April. 

The official unemployment rate stood at 8.2% in the three months ending in April, below the 8.7% recorded in the same period last year . The decline comes despite the expansion of the working-age population and is a positive sign for domestic consumption.

The Chilean Chamber of Construction reported that the Monthly Index for Construction Activity (Imacon) grew 6.9% in April. 

Is the dream combination of solid growth with relatively benign inflation enduring? Broadly speaking, it is, although the consumer price report for May was faintly troubling. Although the headline index rose by 0.3% month-on-month, the core measure, which strips out volatile items such as food and fuel, climbed by 0.5%. On a 12-month basis, the headline index stood at 2.7%. 

Outlook and Implications

As usual, the central bank is on the case. It has been raising the key rate in 25 basis-point increments since September 2004, broadly in lockstep with the US Federal Reserve, and the key rate now stands at 3.25%. The central bank's policy committee holds its monthly meeting tomorrow. In light of the latest Imacec and inflation data, it will probably increase interest rates by a further 25 basis points and signal its intention to continue gradually returning rates to a more neutral level. The risks to inflation spiralling beyond its target range of 2-4% appear slight at this point.

The pace of Chilean expansion will continue to oscillate between months and may well slow somewhat in the second half of the year as world demand softens. All the same, the country remains on track to attain GDP growth of 6.1% this year, moderating to 5.4% in 2006 and around 5% a year into the long term.

WMRC (Reino Unido)

 


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