INFLATION At the end of August, the Consumer Price Index (CPI) inflation reached 3.8 percent year-on-year. After falling noticeably early in the year, prices of perishables followed their usual weather-related and seasonal patterns during the winter. On the other hand, the fall of fuel prices in the first quarter was offset during the second quarter. By the end of the third quarter inflation should drop again, in line with lower fuel prices and the stability of other prices and the usual pattern of perishables during the winter. In the short term, durable prices will probably hold steady, because margins will stop shrinking. Despite a temporary increase in inflation due to the recent depreciation of the peso, CPI inflation is expected to remain within the 2–4 percent target range.

For additional informations about increase in inflation see: link

EMPLOYMENT

In the first half of 2001, labour market conditions deteriorated. Compared to the first half of 2000, employment fell by about 60,000 posts on average, which amounts to a 1.1 percent reduction in employment. Lower job creation led the national unemployment rate to rise during the first quarter to 8.8 percent and to 9.7 percent in the second quarter.

Lower job creation during the first half of 2001 is associated with important sectors of the economy. In agriculture, manufacturing and the retail sector for example, employment fell (2.7 percent, 3.8 percent and -1.15 percent, respectively), while there was a significant rise in employment in construction (8.2 percent) and in financial services (4.5 percent).

Along with problems specific to the labour market, prospects for the recovery of employment in the coming months will also depend on the performance of relevant sectors, such as manufacturing and commerce. One element that could strengthen the future performance of some of these sectors is the possibility of renegotiating debts; the government is encouraging this in favour of labour-intensive firms, particularly small- and medium-sized operations.

BALANCE OF PAYMENTS

External Sector and the Current Account

Results for the first half of 2001 show less growth in both exports and imports compared to the last quarters of 2000. This was mainly due to an external demand that has shown signs of weakening due to deceleration of the world economy, particularly in important trading partners, such as Japan and the United States. During this period, the main impact has been in export prices, which fell by 5.3 percent and 5.6 percent in the first and second quarters respectively over the same period of the previous year. However, export volumes rose by 4.7 percent in the first quarter and a noticeable 13.9 percent in the second quarter. During the first quarter, the value of Chile’s main exports, copper, fell by 0.7 percent, while non-copper exports fell by 0.9 percent. However, during the second quarter, these values recovered considerably, growing by 5.9 percent and 8.6 percent respectively.

On the other hand, imports rose by 8.2 percent in the first quarter before dropping by 3 percent in the second quarter, in line with the performance of domestic demand.

Current account projections for 2001 suggest a US$1.5 billion deficit, that is, 2.2 percent of GDP. This deficit will mainly be the result of eroding terms of trade, particularly the lower price of copper for this year compared to the average 82 cents per pound last year, which adds up to over one percentage point of GDP. This situation is projected to turn around in 2002, when the current account deficit should fall somewhat.

Capital Account

During the first half of 2001 there were significant inflows of direct investment from abroad. In effect, net foreign direct investment rose significantly, reaching US$1.4 billion in this period completely offsetting the negative value registered in 2000.

It is important to mention that the structure of financing has changed. In fact, inflows of medium-term, non-investment capital, mainly credits from abroad, were positive in the first half of the year. In contrast, short-term capital fell, due to outflows associated with foreign trade, the result of a seasonal increase in pending export returns.

Projections for 2001 indicate that the capital account balance will remain positive, due to net income from medium- and short-term credits, particularly those associated with foreign trade, along with positive direct investment inflows. By the end of 2001, the capital account balance is expected to be about 42 percent higher than last year, due to the recovery in foreign investment, which is projected to rise by about 55 percent over 2000. Direct investment abroad by Chileans should rise. Although for the rest of the year net portfolio investment flows are expected to be positive, estimates for the year indicate a net outflow due to the significant outflow already observed. This will occur despite new bonds likely to be issued abroad.

Finally, the measures taken in April by the Central Bank to suppress exchange restrictions affecting a series of financial operations should also influence the future behaviour of the capital account, as they make access to international capital markets more fluid.

EXCHANGE RATE

So far this year, the nominal exchange rate has depreciated by nearly 17.2 percent. The dollar rose from 571 Chilean pesos in January to over 670 pesos in recent weeks. This depreciation was partly due to economic instability in the other economies in the region. Considering this, the Central Bank decided in mid-August to increase the issue of dollar-linked notes and use part of its international reserves (up to US billion until end-December) to intervene in the foreign exchange market, to provide an increased supply of hedging instruments and foreign exchange liquidity. In multilateral terms, the peso has depreciated less, because of weakness against the dollar of currencies such as the euro, the yen and the real. The real exchange rate index: link