"Chile at a Glance” (Monthly Rolling Economic Electronic Presentation)

March 25th, 2015

There are incipient signs of the Chilean economy’s recovery from its deceleration last year. Average private forecasts currently suggest GDP growth of 2.5% in the current quarter, up from 1.8% in the fourth quarter of last year (and a low of 1.0% in the third quarter). Similarly, according to these forecasts, growth over the whole year will reach 2.8%, up from 1.9% last year.

However, much of this recovery is the result of higher fiscal spending and its consolidation in the rest of the  economy faces a number of challenges:

• Inflation. At 4.4% in February, 12-monthly consumer-price inflation was down from 4.6% in December (and a peak of 5.7% in October). However, in view of lower international oil prices, a larger drop had been anticipated and further reductions will be constrained by the impact of the peso’s depreciation on the price of imported goods and of a drought on food prices.

• Consumer confidence. Opinion surveys suggest that consumer confidence may be beginning to strengthen again after its sustained decline last year. However, it remains low and will be very sensitive to inflation and employment figures.

• Business expectations. A recovery of investment from its contraction last year will, beyond plans for increased public investment, depend crucially on business confidence which has been dented by government measures that include last year’s tax reform and a planned reform of labour legislation, as well as a broader crisis of confidence in politicians and political parties generated by allegations of illegal campaign financing that cut across much of the political spectrum.

• External factors. For the small, open Chilean economy, there are a number of clouds on the international horizon. They include slower growth in China, with its negative impact on copper prices, the prospect of higher US interest rates and, in Latin America, the weakness of the Brazilian economy. 2014 RESULTS Figures for the economy’s performance in 2014, released recently by the Central Bank, showed a marked deceleration of both output and demand:

• GDP growth. At 1.9%, GDP growth in 2014 represented a sharp drop from 4.2% in 2013. However, after slipping
from 2.7% in the first quarter to 2.1% in the second quarter and 1.0% in the third quarter, it recovered slightly to 1.8% in the last quarter.

• Investment. The deceleration of growth was driven by a drop in investment. Measured as gross fixed capital formation, it contracted by 6.1% over the whole year. However, like GDP growth, it appeared to change trend in the last quarter when
it expanded by 0.5%, after dropping by 4.9%, 7.8% and 12.1% in the first, second and third quarters, respectively.

• Consumption. In 2014, household c onsumption grew by 2.2%, down from 5.9% in 2013, showing a deceleration
that persisted throughout the year. Growth of government consumption, on the other hand, accelerated from 3.4% in
2013 to 4.4% in 2014.

• External accounts. At US$75.7 billion, exports of goods were down from US$76.5 billion in 2013 while imports of goods
contracted from US$74.7 billion in 2013 to US$67.9 billion in 2014. This was reflected in a narrowing of the current account
deficit to 1.2% of GDP, down from 3.7% in 2013.

• In January, the three-month rolling-average unemployment rate increased to 6.2%, up from 6.0% in December, despite
a seasonal increase in agricultural jobs and a low 1.1% expansion of the workforce.

• In the 12 months to January, nominal wages rose by 7.1%, equivalent to a 2.5% increase in real terms, showing virtually
no change on December.

• The Selective Share Price Index (IPSA) gained 3.8% in February after losing 0.4% in January; in March, however, it
has again lost ground, due partly to drops in the share prices of companies with investments in Brazil.

• Over the first two months, exports reached US$11.5 billion, slightly down from US$11.7 billion in the same period last
year, while imports dropped to US$9.4 billion, down from US$11.4 billion in the first two months of last year; as a result,
there was a trade surplus to February of US$2.1 billion as compared to US$352 million a year earlier.

• In January and February, the international copper price dropped to monthly averages of US$2.64/lb and US$2.59/lb,
respectively, down from US$2.91/lb in December; in March, prices have, however, strengthened again slightly.

• The peso continued to depreciate against the dollar in January and February when the exchange rate averaged 621
and 624 pesos/dollar, respectively, as compared to 613 pesos/dollar in December; this trend has become more marked in
March, with daily rates of up to 642 pesos/dollar.

At its latest monetary policy meeting on March 19, the Central Bank opted to hold its nominal benchmark interest
rate at 3.0%, its level since October. In view of the smallerthan-expected reduction in inflation, local forecasts currently
suggest that it will remain at this level through to December.

In the coming months, the centre-left Bachelet administration will be seeking to achieve progress in Congress on bills that
include a reform of labour legislation and further initiatives in its planned educational reform. However, its attention and that of Congress is likely to be distracted by court investigations of campaign financing and a questioned real estate deal in which President Bachelet’s son played an important role. Debate has, as a result, focused on the need for measures to increase transparency for which an independent advisory commission has been established and is due to report in mid-April.