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Chilean Economy Expands Steadily in 2007 Despite Energy Problems
25 Mar 08
Despite growing difficulties in the energy sector, the Chilean economy expanded by 4% during the last quarter of 2007 and 5.1% in the year as a whole.
Global Insight Perspective | | Significance | GDP rose by 4.0% year-on-year (y/y) during the fourth quarter, bringing the overall expansion to 5.1% during 2007. | Implications | The most positive note comes from higher growth rates of gross capital formation, which expands production capacities improving the growth potential in coming quarters. On the other hand, manufacturing and utilities continue to suffer from the negative impact of natural gas shortages and the ongoing drought. | Outlook | Sustained inflationary pressures, a deteriorating global environment, and continued difficulties in the local energy sector will slow down the Chilean economy in 2008. |
Statistics released yesterday by the Chilean central bank show that the Chilean economy grew by 4.0% y/y during the fourth quarter of 2007, along the same lines as the third-quarter results, but significantly slower than the revised 6.2%-y/y expansion registered in January-June 2007. This brought the overall GDP expansion for 2007 to 5.1%. Weighted by relative size, the sector that contributed the most to economic growth last year was financial services, accounting for 1.26 percentage points of the total GDP expansion, followed by commerce, hotels, and restaurants, construction, personal services, transport, manufacturing, communications, and mining. Natural gas shortages combined with low reservoir levels caused a significant reduction in output of energy, gas, and water, subtracting one-quarter of a percentage point from overall GDP growth. The negative effects of insufficient supply of natural gas on overall economic performance had been anticipated by earlier data releases on industrial production (see Chile: 1 February 2008:Economic Activity Continues to Show Weakening Signs in Chile During December). GDP Growth | Sector | 2007 Growth Rate (%) | Share of GDP (%) | Contribution to GDP Growth (%) | Financial services | 7.76 | 16.22 | 1.26 | Commerce, hotels, and restaurants | 6.53 | 10.46 | 0.68 | Construction | 8.32 | 7.19 | 0.60 | Personal services | 3.87 | 10.82 | 0.42 | Transport | 5.85 | 7.10 | 0.42 | Manufacturing | 2.55 | 16.11 | 0.41 | Communications | 13.35 | 2.61 | 0.35 | Mining | 3.65 | 7.28 | 0.27 | Housing | 3.65 | 5.38 | 0.20 | Agriculture and forestry | 3.97 | 3.82 | 0.15 | Public Administration | 3.47 | 4.00 | 0.14 | Fishing | -0.14 | 1.08 | 0.00 | Electricity, gas, and water | -10.72 | 2.37 | -0.25 | GDP | 5.10 | 100 | 5.10 |
Aggregate demand saw expansions across the board in its major components, although showing some signs of deceleration. Gross capital formation jumped by 11.9% y/y during 2007 on the back of strong construction (up by 8.9% y/y) and plants and equipment (up by 15.5% y/y). Total exports of goods and services grew by 7.8% y/y, absorbing 40% of total GDP for the period. Mining products (especially copper), industrial products (mainly paper and fish products), and agricultural and forestry products continued to be the best performers in terms of external sales. Household consumption grew by 7.7% y/y, while government consumption increased by 5.8% y/y.
External accounts also reflect the continued economic expansion. The current account of the balance of payments registered a US$7.2-billion surplus, approximately 5% of GDP for the period. This figure was the result of a US$22.5-billion trade surplus and net transfers of US$2.97 million, which were partially offset by a US$18.26-billion deficit in the income account—largely originating from profit remittances of multinational firms operating in the country. The capital and financial account posted a US$6.2-billion deficit. Net foreign direct investment during the reference period amounted to US$10.62 billion. In all, the balance of payments registered a negative US$3.2-billion position. Outlook and Implications National income account data for the fourth quarter of 2007 confirms what was previously anticipated by the economic activity index IMACEC and sectoral data. Weaker performances of industrial production, and contractions in mining and utilities, weighed down the positive results observed in the rest of the economy. Natural gas shortages, combined with high crude oil prices and low reservoir levels have impacted negatively on some sectors. From an aggregate demand perspective, the resilient expansion of gross capital formation, which means expanded production capacities in the quarters ahead, are very for the Chilean economy. Meanwhile, the negative balance of payments does not constitute a major risk for the Andean country, given its solid underlying external position.
Looking into the near future, Chile's growth outlook will be conditioned by difficulties arising from the energy sector, which will continue to face natural gas shortages and reduced hydroelectric output as a result of an extremely severe drought. These events, combined with resilient crude oil and food prices will keep feeding inflationary pressures, calling for more monetary tightening. In addition, the grim global scenario will be very to likely affect export dynamism and curb consumers' expectations, reducing demand impulse in the domestic economy. All in all, although the fundamentals of the Chilean economy remain strong, Global Insight expects the Chilean GDP to expand by 4.1% during 2008.
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