Chile December Manufacturing Shrinks for Second Time in 2012

Chile’s manufacturing index last month contracted for the second time in 2012 on a decline in the output of metal and chemical products, giving policy makers little space to raise borrowing costs to cool a surge in consumer spending.

Manufacturing declined 2.5 percent in December from the previous year, compared with the median estimate of 15 analysts surveyed by Bloomberg for a 1 percent increase. Retail sales rose 11 percent from 2011 after climbing 10.9 percent in November and 6.6 percent in October, the National Statistics Institute said in a report published today.

The data helps confirm the economy is growing at two speeds after retail sales increased almost four-times faster than manufacturing in all of 2012. The central bank board has little space to change the key interest rate because an increase may stymie industrial output and a cut would further stimulate domestic spending, economist Matias Madrid said by telephone.

“Risks are balanced, which means the central bank should keep the interest rate on hold,” said Madrid, chief economist at Banco Penta in Santiago.

The peso, which has gained 1.7 percent against the U.S. dollar in the past three months, rose 0.1 percent to 471.27 per dollar at 11:59 a.m. local time today.

Policy makers have kept borrowing costs at 5 percent for 12 straight monthly meetings. The key rate will rise to 5.25 percent by February 2014 after remaining unchanged for at least the next six months, according to traders and investors surveyed by the central bank on Jan. 22. Inflation in December eased to 1.5 percent, the slowest in 2 1/2 years.

Growth, Output

Production of wood, chemical and metal products contracted in December from the previous year, offsetting gains in output of paper, refined products and foodstuff, the institute said today. There was one less working day as well as an extra holiday in December from the previous year, it said.

Copper output in the world’s largest producer of the metal fell 1.8 percent over the period to 513,344 metric tons, according to today’s report.

Gross domestic product climbed 5.7 percent in the third quarter from the previous year as investment leaped 13 percent and private consumption gained 6.4 percent, according to central bank data.

GDP expanded 5.7 percent in the second quarter and 5.2 percent in the first, and grew an estimated 5.45 percent for all of 2012, according to analysts polled by Bloomberg.

Current Account Gap

The current account deficit widened to 7.4 percent of GDP in the third quarter from a gap of 4.9 percent in the year-ago period as exports contracted 3.4 percent and imports gained 2.5 percent. A monetary stimulus, while providing a boost to manufacturing, would threaten to exacerbate that gap, Madrid said.

“So long as internal demand continues with this level of vigor, which impacts the current account deficit because of excessive spending, the central bank clearly won’t reduce rates,” Madrid said.

Two-year interest rate swaps, which reflect traders’ views of average borrowing costs, were unchanged at 10:47 a.m. from yesterday’s close of 5.22 percent.