2011-04-18

Chile: Economy’s boom tempered by fears of inflation

“We’re taking full advantage of the market’s opportunities, growing more than was projected, increasing investments and improving conditions to increase competition,” said Minister of Economy Juan Andrés Fontaine. (Courtesy of Asexma)

“We’re taking full advantage of the market’s opportunities, growing more than was projected, increasing investments and improving conditions to increase competition,” said Minister of Economy Juan Andrés Fontaine. (Courtesy of Asexma)

By Adrián Martínez for Infosurhoy.com—18/04/2011

SANTIAGO, Chile – The picture is bright, but uncertainty looms.

That’s how Chile’s economy is being described by the country’s Central Bank. The economy got off to a great start this year, showing high growth rates, but signs have appeared that indicate inflation may be on the horizon.

On April 5, the Central Bank reported the Monthly Financial Activity Index (IMACEC) for February reached 7.2%, the best for the month in the past 15 years. It was nearly a whole point above market projections, which had been somewhere between 5.8% and 6.4%.

The second telling sign came from the reactions to February’s IMACEC. Government economists forecast the index would be even higher for March, somewhere between 15% and 18%.

“In March we’re going to have double-digit growth, easily above 10%,” Minister of the Treasury Felipe Larraín said at a recent media conference.

José de Gregorio, president of the Central Bank, was even more upbeat when he predicted “the IMACEC for March could grow close to 15% if the dynamism shown by the Chilean economy in the beginning of 2011 is sustained, taking into account the low base for comparison with the same month in 2010, which was greatly hurt by the earthquake of Feb. 27 [of last year].”

If these forecasts hold, the first trimester would close with a growth rate above 8%. The Central Bank forecast the economy would grow between 5.5% and 6.5% in 2011, according to its latest Report on Monetary Policy (IPOM).

Trade, economy’s engine

When analyzing the numbers for the first few months of 2011, analysts, including Joseph Ramos, an economist at the University of Chile, said trade is driving the economy.

“The determining factor [in February] was essentially trade, with [an increase of] retail sales of almost 17%,” he said.

Víctor Salas, a professor at the University of Santiago agrees with Ramos.

“The IMACEC increases have resulted mainly from trade expansion and also from seasonal production in the fruit-growing, forestry, and fishing [industries], but this limits the production capacity of the country.”

That’s because when it comes to the economic projections for the remainder of the year, the economic growth will start hovering around 6%.

“Trade sales should start to lose pace beginning in April,” Ramos said. “On the other hand, I hope that construction, which thus far has been lagging, will start to boom because of the greater expenditure in reconstruction, both in the public and private sectors, which will start maturing this year.”

Ramos and Salas forecast the economy will expand around 6.3% this year.

“The trend will be around 7% to 8%, which means that for 2011 the GDP will grow around 6%, depending on what kind of inflationary pressures we have this year, and how the Central [Bank] and the Treasury act to contain them,” Salas said.

The menace of inflation

There are signs indicating inflation is a looming concern for the government, especially after the Central Bank reported on April 4 that price increases could reach the ceiling – between 2% and 4% this year – in the near future.

The Consumer Price Index (IPC) for March, released on April 8, put the inflation rate at 0.8%, higher than the rate of between 0.2% and 0.3% predicted by analysts and market operators in previous months.

The Central Bank attributed the inflation to the rising cost of fuel and food worldwide.

Economists said inflation ultimately will reach 4.3% this year. In December, the government forecast inflation of 3.3% for 2011.

The government, however, said inflation would not ruin the country’s economy.

Recently, while acknowledging there are “certain dark clouds on the horizon,” Minister of Economy Juan Andrés Fontaine said the country’s economic outlook remains positive.

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