The release of Chilean Q4 GDP data on Monday confirms that the economic slowdown in late 2011 was not as marked as many had initially feared, according to Capital Economics.
Going by the report of Capital Economics the most recent monthly indicators suggest a pick-up in activity in Q1. While this is encouraging news, growth is heavily dependent on the strength of domestic demand which, in the absence of further rises in base metals prices, will slow down this year.
Official statistics from Chile’s central bank revealed that the economy grew by 4.5 percent y/y in Q4 2011. This was above expectations for a 4.2 percent y/y increase.
Capital Economics adds that the most recent monthly activity data also show that Chile’s economy gained momentum in Q1. Unemployment has continued to fall and consumer confidence rose to its highest level since early 2011 in January. The strength of the recent data, combined with a more favorable external outlook, has caused the central bank to call a temporary halt to monetary easing following a preliminary 25 basis points rate cut in January.
However, on a negative point Capital Economics notes that Chile’s economy has become increasingly reliant on domestic demand over the past few years, while industry has barely grown.
Michael Henderson, Emerging Markets Economist of Capital Economics, said that Chile now looks vulnerable to weakness in commodity markets. The key point is that even if the average price of copper were to remain at its present high level until the end of 2013, domestic demand is still likely to abate from its current rate.
Capital Economics expects the prices of all industrial metals to fall by an average 20 percent this year and thinks that copper could reach $6,000/MT by the year end. This could affect the GDP growth.