Note: This is a beta version. I will probably be going over it a couple of times before I am completely happy with it. Moreover, please note that all pictures can be seen in a bigger format by clicking on the which will open a new window or tab

It has been a while since I last had a thorough look at Chile (here and here); more specifically, the last time I had Chile under the loop was in October 2008 and thus around the time when the global economy was about to enter two quarters (Q4-08 and Q1-09) of absolute horror. Whether we are past the worst at this point in time is debatable and I am, personally, skeptical with regards the narrative of second derivatives and green shoots, but it is hard to deny that it does represent a narrative and a fairly strong one too. In this context I thought it would be interesting to have a look at Chile, how it has faired and how we can expect it to fair in the immediate future.

It will immediately become clear as we move forward through the data that Chile is a bit unique both in a global and most definitely so in a Latin American context. In this sense, and if not for any other reason, the following should confirm that although the global economy is in the midst of the worst crisis since the 1930s, there are some economies who are better positioned than others. In order to pin down some fix points from which to begin this analysis, it is interesting to go back to Q4-2008 and the note by Morgan Stanley analyst Luis Arcantales who pointed out that as the global economy was about to slide, it was Chile's time to shine. This analysis was echoed in the Economist's small article about Chile in which it is argued that Chile is cashing in the fruits of rigour.

The question is then; is this true?The analysis which follows supports this positive view on Chile and I thought it would be fair, at the offset, to identify the two underlying mechanisms for this position.

First of all, Chile has been saving for a rainy day and especially in the context of the copper windfall enjoyed in the past years, Chile have been acting with utmost prudence. Coupled with a big pool of sovereign assets/wealth tucked away in main state investment vehicles (SWF) this provides Chile with an enviable and essentially remarkably positive fiscal profile going into the crisis. The most important aspect of this strategy of prudence has been the joint commitment across political leaderships to maintain a structural fiscal surplus of 0.5% of GDP in order avoid the copper windfall from pushing Chile into a variant of the Dutch disease as well as of course as to lock in savings for rainy day. Between 1996 and 2006, Chile’s public balance averaged 1.5% of GDP and coupled with a substantial amount of the copper windfall parked in the SWF Economic & Social Stabilization Fund (FEES) it has granted Chile with a net debt position of -11% (i.e. a net credit position of 11%).

In addition to the story about the timely management of the Copper windfall, I have also emphasised the demographics of Chileand in particular the fact that the key working age brackets are still growing as a percentage of total population. In many ways, Chile is now moving on the outskirts of the so-called demographic dividend with the age group 25-64 still growing as a percentage of total population whereas the age group 25-44 is declining. It is an empirical fact that such favorable demographic momentum has a strong effect on macroeconomic performance; see e.g. Bloom et. al 2007 and Bloom and Williamson 1998.

However, with fertility coming in at replacement levels in these very years Chile now stands on the boundaries of the much debated second demographic transition (SDT) and it will be interesting to see just how Chile enters this second leg of the demographic transition (if at all). It is important to point out that the SDT is far from an inevitable process, but in it the light of the regularity with which life expectancy has continued to increased at the same time as fertility has steadily moved below replacement levels in one country after another, it is difficult to imagine that Chile won't also enter a new stage in its demographic transition. However, and whatever happens in Chile as we move forward it does not change the fact that Chile has the demographic winds blowing firmly in the back at the moment even if the direction is changing. The key will naturally be the extent to which Chile manages what comes next in terms of demographic evolutions.

Touched, but not Harmed?

Even with this set of formidable fundamentals the global economic crisis has not left Chile untouched. On a quarterly basis the third quarter of 2008 marks the last quarter in which Chile grew at the rates its citizens and policy makers have been used to over the course of the years of abundance leading up to the crisis. Since Q3-2005 the average growth rate of Chile's output measured by GDP was a remarkable 4.5% q-o-q, a figure which clocked in at a puny 0.2% in Q4-2008 and then on to a full blown contraction of 2.1% q-o-q in Q1-2009. In fact on an annual basis, Chile has observed negative growth rates since Q3-2003.

The central bank expects GDP for 2009 to hover around the 0% mark with -0.75% as a low point and the 0.25% as the corresponding best case scenario. This relatively bleak figure is produced by the expectations that domestic demand will contract at a rate of 4.7% of which the expected decline in gross capital formation of of -14.3% which contrasts with a 19.5% expansion in 2008.

This headline forecast naturally calls for all kinds questions not least the impending question, as it is being asked around the world, about the extent to which Chile will ever recover to observe growth rates it did before the global crisis. Personally, I believe that most analysts would agree that the script on 2009 as a horrible year is already written and the question now becomes; will 2010 be the year of recovery or will it be the year of disappointment as the boost from 2009's stimulus packages wane and it becomes clear that any kind of second leg with respect to a sustained pickup in global growth will be very tepid. I tend to lean towards the latter account, but it is also clear that the extent to which the global economy is able to limp forward, it will be economies such as Chile who will be doing a lot of the heavy lifting.

This particular view motivates a lot of what follows.

A Closer Look at Trends in Output and Activity

One way in which to differentiate the GDP measures fielded above is to have a look at GDP divided onto sectors to see how ouput in Chile has evolved over a wide array of activities as well as to compare this to some form of base value. As can be seen from the graphs to the right; I have chosen to focus the attention on cobber, manufacturing, construction, housing property, and financial services.

In the graph to the right the base value 100 is equal to the mean value of output over 4 quarters in 2003 measured at constant 2003 prices. For an economist with an inclination to base his analysis on underlying demographic parameters one thing immediately stands out. Indices for construction and housing property have hardly budged. This is interesting since the main driving force across of the real economic collapse across the globe is, in the case of many other economies, precisely driven by a collapse in these sectors. Now, whether this is because Chile did not entertain the same kind of bubble-like environment as elsewhere or whether it represents the fact that Chile's demographic profile would exactly lead us to the point that these precise sectors should be well supported by the underlying fundamentals I will remain silent.