Chile Exits Recession in Q4, Central Bank Holds Policy Rate Flat

National income accounts data released yesterday by Chile's central bank show that the economy expanded 2% year-on-year (y/y) during October-December 2009 after three quarters of negative growth, resulting in an overall 1.5% GDP contraction for the whole year. On the supply side, fourth-quarter growth was driven by utilities, which contributed 0.43 of a percentage point out of the total 2.0% expansion, followed by commerce (0.4%), mining (0.26%), financial services (0.25%), communications (0.23%), agriculture (0.13%), and transport (0.13%). On the other hand, construction (-0.36%), manufacture (-0.1%), and fishing (-0.1%) registered quarterly declines during the period under review, reducing the overall economic upturn. Utilities benefited from higher hydroelectric production, as well as increased supply of natural gas. Growth in commercial activity was driven by retail sales and a rebound in new car sales. The expansion in communications resulted from an increase in mobile phones' activity.

Domestic demand grew 1.5% y/y, propelled by a 5.7% y/y increase in total consumption, though this was partially offset by an 11.9% y/y reduction in gross capital formation. The latter was the result of a steep decline in plant and equipment investments (down 17.1% y/y), and construction (down 6.4% y/y). In turn, government consumption grew 6.4% y/y during the fourth quarter, while private consumption did so by 5.5% y/y. Private consumption climbed on the back of its three components: non-durable goods (up 4.4% y/y); durable goods (up 14.5% y/y); and services (up 4.5% y/y). Total exports of goods and services declined by 3.7% y/y, hurt by a sharp decline in fish exports as well as those of industrial goods such as metallic products, machinery and equipment, and wood pulp. Furthermore, real imports fell 4.0% y/y, affected mainly by lower domestic demand for industrial inputs. Finally, inventories were reduced by approximately 2.4% of GDP.

External accounts improved significantly with respect to 2008. The current account of the balance of payments registered a US$4.21-billion surplus during 2009, approximately 2.7% of GDP for the period. This figure was the result of an US$13.98-billion trade surplus and net transfers of US$1.61 billion, which were partially offset by a US$10.13-billion deficit in the income account—largely originating from profit remittances of multinational firms operating in the country. In turn, the capital and financial account posted a US$4.10-billion deficit. Net foreign direct investment during the reference period amounted to US$12.70 billion.

Central Bank Maintains Policy Rate

The monetary policy committee decided yesterday to keep the policy interest rate at 0.5% per year, the level that has been guiding the market since July 2009. Central bankers had largely anticipated they will hold the rate flat until the second quarter (see Chile: 12 February 2010: Chilean Central Bank Keeps Key Interest Rate at 0.5% in February). In the aftermath of February's devastating earthquake there are plenty of reasons to maintain the monetary stimulus until more information to evaluate the full extent of the damages and its economic impact becomes available.

Outlook and Implications