Meanwhile, the general trend indicates that although there has been a notable drop in the constant price value (in mill pesos, 2003 prices) activity has not collapsed in any sense of the word and remain well above its base value. Now, there has of course been a decline and the jury is still out with respect to the extent that the decline will continue, stabilise or turn into growth. Most likely growth will resume its due course over the course of h02-2009, but as in all other places in the world it is the level of this growth which may ultimately surprise on the downside. One area where activity has markedly declined since the middle of 2008 is in the context of manufacturing and in this sense it is worth while having a closer look at the underlying pattern here.

If we start by looking at the manufacturing indices in the first difference (change) and represented through a 6-month moving average to try to smooth out the trend for the naked eye we observe the negative trend as it has grapped hold in the latter parts of 2008 and into 2009. However, we also observe that this does not like the horrible charts that we have seen e.g. in the context of the US, Europe and Japan. The average monthly rate of change in the general index through the 12 months ending April 2009 was -0.2% which is not exactly cataclysmic; in terms of the subcomponent the production of durables on the other hand decline at an average rate of a full 2% (mom) whereas the average change in the value of capital goods was 1%.

During the time measured in the graph to the right the general index peaked in March 2008 at 139.7 and bottomed in February at 112.8 after which it has recovered to 123.1 at the end of April. As noted, a large part of the drop in the latter part of 2008 and into 2009 was a sharp decline in the value of production of durables which fell (on an index basis) to a low of 65.9 in February 09. At this point in time the production of durables furthermore remain depressed relative its long term trend. Conversely, the value of production of consumer goods and capital goods have pretty much shadowed the trend in the general index; or more aptly, it is the relative stability of these two indices which have helped the general index to skirt what has been a sharp decline in the production of durables.

Finally and perhaps to end where I should have started it is worthwhile to have a look at the main index for economic activity in Chile (the IMACEC).

Looking at this index it is difficult not to conclude that Chile appears to have managed the initial stages of the economic crisis quite well. Surely, the index is down as one would expect but at this point at least, it does not appear to be a decline which will buck the general trend. The index peaked in June 2008 and has since fallen back 5% at the end of April. The most recent data however confirm that the slowdown is lingering as we approached the second half of 2009 with industrial production dropping 10.5% yoy in May prompting comments from central bank president Jose De Gregorio to note that nominal interest rates could be lowered further from its already low level at 0.75%. Moreover, the monthly GDP indicator showed that Chile continued to contract as we entered Q2 posting yoy 4.6% decline and with monthly inflation rates beginning to post negative readings policy makers and analysts close to Chile remain alert. As we have just rapped up Q2 in real time it appears that Chile is poised to surprise somewhat on the downside in terms of prior expectations.

The External Sector

The analysis of Chile's external balance and the country's currency is of course closely tied to the evolution of international copper prices as Chile is, by far, the world's biggest producer and exporter of copper.

Although copper prices have fallen back somewhat in the midst of the global recession relative to the average values through 2006-2008 they are still higher than they were at the turn of the century when the price of copper were below 1 USD/lb. In fact, the graph should make any trader look more than once since with the recent increase the price of Copper is very close to breaching the its 12 month moving average price although of course the strength of the global momentum in general will decide whether commodities, and thus Copper, will fly again. As an aside, it would be very interesting to run an analysis on the extent to which the recent move upwards in Copper prices has anything to do with the reports that China is stocking up on commodities(it does of course, but how much?)

The positive effect from copper on Chile's external balance has, at times, been coined as the copper bonanza and Chile's ability to manage this bonanza in a prudent manner is one of the reasons that the country stand out in the current environment. In general however, the composition of Chile's external balance look very much like one would expect of course that the current account has been in surplus since 2004 due to the positive impact from the trade balance and thus net exports of copper. Thus, up until the advent of the financial crisis Chile's current account was characterised by a positive trade balance which outweighed a negative income balance to produce a consistent current account surplus. This changed in the latter part of 2008 where Chile posted a current account deficit in Q3 and Q4 as copper prices plummeted and exports in general fell. Basically, the trade balance withered away into a small deficit and with a continuing negative income balance, Chile found itself in need of external financing for the first time in 5 years. It also pushed the current account deficit into deficit for the full year 08 and the central bank, rather surprisingly, expects 2009 to see another CA deficit. I say surprisingly here since Q1-09 has so far posted an overall CA surplus worth 639 billion USD driven by a strong trade balance (mainly due to a plunge in imports and higher Copper prices). In any case, it is difficult to imagine that Chile will any problem financing a current account deficit of the magnitude the central bank is forecasting at 1.8% of GDP in 2009.

Turning the analysis to the currency it is interesting to observe that last time I looked at Chile inflation was running close to 10% and with nominal interest rates below the inflation rate the Chilean economy was experiencing negative real interest rates. In the context of the currency this meant that just as we were rounding up Q3 2008 the Chilean central bank decided to hold back on its frequent endeavors into the market to stem the rate of appreciation of the Peso against the USD. Endeavors, which by the way, have been unable to buck the overall trend in appreciation of the CLP ever since 2003 against the USD.

Of course, events had it in Q4 2008 that markets were to experience a significant amount of stress and rising volatility which sent the Peso down against the G3 currencies where it is only now recovering.