Chilean Economy Grew at Fastest Pace in Three Quarters

Chile’s economy grew at the fastest pace in three quarters in the first three months of the year as exports from the world’s top copper producer picked up.

Gross domestic product expanded 5.6 percent from the year earlier, the central bank said in a report posted on its website today, in line with analyst forecasts and compared with 4.5 percent in the previous three months. Exports gained 6.2 percent, while internal demand grew 4.9 percent. From the previous three months, GDP grew 1.4 percent.

Chile is the third Latin American country to report a pickup in first-quarter growth in the past two days after Mexico and Venezuela. Whereas government spending fueled growth in Venezuela, exports drove the expansion in Chile and offset slower increases in investments and internal demand. Investment growth eased to 8.3 percent in the first quarter from 16.3 percent in the previous three months.

“This was a surprise to me; I wasn’t expecting consumption and investment to moderate that fast,” Alfredo Coutino, Latin America director at Moody’s Analytics, said by telephone. “This is going to alleviate pressure on policy makers to increase the rate.”

The central bank yesterday kept its benchmark rate at 5 percent for the fourth straight month. Policy makers will increase borrowing costs to 5.25 percent by November, according to the median estimate of 58 traders and investors polled by the bank on May 8.

European Crisis

Since the central bank survey, traders have increased bets that interest rates and inflation will ease as concern mounts that the European sovereign-debt crisis will reduce demand for commodities like copper, which accounts for more than half of Chile’s exports.

Other than some factors like falling copper prices, Chile hasn’t yet seen a “significant” impact from this week’s turmoil in Europe, Finance Minister Felipe Larrain told reporters today in Santiago.

“This is a dynamic economy that is creating jobs and expanding despite the problems in the world economy,” Larrain said. “Production is growing more than internal spending, which is interesting because it allows us to say that we don’t have excessive or significant inflationary pressures.”

Reduced Risk

One-year breakeven inflation, which is derived from the difference between nominal and inflation-linked yields on swaps, fell 29 basis points from May 8 to 2.79 percent today. One-year interest rate swaps, which reflect traders’ views of average borrowing costs, declined 30 basis points to 4.84 percent over the same period.

“The moderation of demand to around trend and well anchored inflation expectations reduce significantly the risk of rate hikes in the near term despite a tight labor market,” Alberto Ramos, senior Latin American economist at Goldman Sachs & Co., said in a note e-mailed to investors today.

First-quarter growth exceeded estimates made by policy makers in April and compares with 4.5 percent in the fourth quarter and 3.7 percent in the third.

The International Monetary Fund estimates Chile will grow 4.3 percent in 2012, exceeding the regional average of 3.7 percent while trailing Peru, Venezuela and Colombia.

The construction and retail industries expanded 9.5 percent and 8.3 percent respectively in the first quarter, while oil refining contracted 12 percent, the central bank said. Internal demand grew at the slowest pace since 2009, when Chile suffered its worst recession in more than a decade, and investment climbed at the slowest rate in two years.

Growth Outlook

As the euro region’s debt crisis intensifies, economic growth may moderate in Chile as it did in the third quarter of last year, Alejandro Puente, an economist at Banco Bilbao Vizcaya Argentaria SA in Santiago, said.

“Once again we’re experiencing an increase in uncertainty,” he said by telephone yesterday. “It begs the question whether the phenomena will somehow occur again where global uncertainty causes an economic deceleration.”

Chile’s benchmark stock index, the IPSA, slid 0.5 percent to 4,256.18 at 1:21 p.m. Santiago time today, the lowest level since January.

The government has prepared a contingency plan that would entail tapping its $14.9 billion sovereign wealth fund to protect liquidity and employment if the global environment suddenly deteriorates. Government consumption grew 0.5 percent in the first quarter, its slowest pace in at least three years.

“Although we have been facing complex situations abroad, the Chilean economy has continued developing,” Larrain told reporters yesterday. “But I want to be frank: We are not immune and we aren’t bulletproof.”

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