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Chile Economy Expands More Than Forecast on Robust Demand

Chile Economy Expands More Than Forecast on Robust Demand

Posted by Juan Gavasa on May 19, 2014

Chile’s economic growth slowed less than analysts predicted in the first quarter as wage increases fueling domestic demand helped offset falling metals prices in the world’s biggest copper producer. The peso strengthened.

Gross domestic product expanded 2.6 percent from a year earlier, the central bank said on its website today, down from 2.7 percent in the fourth quarter. The gain compares with a 2.4 percent median forecast of 14 analysts surveyed by Bloomberg.

“This is good news and will serve to mitigate some of the ultra-negative views on expansion this year,” Jorge Selaive, the chief economist at Banco Bilbao Vizcaya Argentaria SA, said by telephone from Santiago. “With this result, we see growth closer to 3.5 percent than 3 percent” in 2014, he said.

Policy makers cut the benchmark interest rate four times in the past eight months in a bid to shore up the economy. Growth slowed as copper prices fell to a four-year low amid slowing demand in China, putting an end to an investment boom in the country’s mining industry.

The peso pared its year-to-date loss, gaining 0.4 percent to 548.72 per U.S. dollar at 9:42 a.m local time. The currency has weakened 5.3 percent against the dollar in the past six months, the worst performing currency among 24 major emerging markets after the Argentine peso.

Widening Deficit

Chile’s deceleration comes as President Michelle Bachelet proposes tax increases to fund more social spending and Finance Minister Alberto Arenas says the budget deficit may be wider than initially forecast because of a drop in revenue.

The central bank left the key interest rate unchanged at 4 percent for a second month last week after the inflation rate rose to a five-year high in April, limiting the room to stimulate growth. Prices climbed 4.3 percent from a year earlier, above the 2 percent to 4 percent target range for the first time since February 2012.

“With this higher-than-expected inflation profile and slightly stronger growth, they’re probably going to have to resist cutting,” David Rees, an emerging market analyst at Capital Economics, said by phone from London. “Although this GDP number is above consensus, the bigger picture is that it’s still pretty weak.”

Analysts say they expect policy makers to resume rate cuts in June, forecasting that inflation will slow to about 3.1 percent in 11 months, according to a central bank survey released May 12.

Falling Investment

Investment fell 5 percent in the first quarter from the year earlier, while consumer demand increased 3.7 percent, the central bank said. Investment had fallen 12.3 percent in the fourth quarter. GDP grew 0.7 percent in the first quarter from the previous three months.

Demand remained “robust” sustained by wage increases that are growing by about 6 percent, Ruben Catalan, an economist at Banco de Credito e Inversiones, said in a note to clients.

Imports of capital goods fell 30 percent in April from a year earlier, indicating weak growth persisted in the second quarter. The decline was led by a 52 percent slump in imports of machinery for mining and construction.

Economic Rebound

As the world economy rebounds, growth in the South American country will accelerate toward the end of the year, said Nathan Pincheira, an economist at Banchile Inversiones in Santiago. GDP will expand 3.6 percent this year, surpassing the average of Latin American nations by more than one percentage point, according to analysts polled by Bloomberg.

“We expect growth to start rallying in the fourth quarter, led by a pick-up in investment and a dynamic external sector,” Pincheira said

Copper for delivery in three months rose 0.9 percent to $6,925 a metric ton on the London Metal Exchange today, up from a four-year low of $6,415 on March 13.

Mining companies from Anglo American Plc. to Teck Resources Ltd. have postponed $43 billion of projects in Chile as they weigh rising costs and declining copper prices, according to the National Mining Society, an industry lobby group.

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