Just as one swallow doesn’t make a summer, one bad number doesn’t necessarily spell doom. But the market was taken aback on Tuesday when Chile’s industrial ouput came in far worse than expected – slumping 0.8 per cent in October compared to the same period the year before. The market had expected a rise of around 4 per cent.

Why the poor showing? Two words: eurozone contagion.

While mining, Chile’s bread-and-butter, grew, with October copper output up 1 per cent compared with October last year, the weak industrial output figure suggests that the eurozone crisis is feeding through to Chile, through lower demand for its exports and slowing growth.

Chile’s economy is wide open to foreign trade and thus more vulnerable to external shocks, and the eurozone crisis looks unlikely to get better any time soon, raising concerns of how big the impact in Chile, the world’s top copper producing nation, will be.

There have been quieter signs, too, of eurozone contagion. Codelco, the state copper miner, lined up financing earlier this year with a company (whose identity has not been disclosed) to exercise an option over 49 per cent in assets owned by Anglo American in Chile, and even had the press release written when the company pulled out because of concerns fuelled by the international environment. (Codelco ultimately did a deal with Mitsui, the Japanese trading house instead, and then a major fight broke out with Anglo, but that’s another story.)

Production and sales fell in 13 of the 19 sectors measured by the national statistics institute, INE, including things like wood and textiles which Chile typically exports, revealing how the international slowdown is impacting Chile. Though industrial production has still risen 6.3 per cent so far this year, this was the first monthly fall since the aftermath of Chile’s devastating February 2010 earthquake.

Two things have happened as a result: the market is now starting to factor in a cut in interest rates sooner rather than later – perhaps even from next month (from 5.25 per cent, where it has been for the last five months) – and analysts have started to snip their growth forecasts for this year.

Gemines, a financial consultancy, said it now expected the IMACEC, the economic activity index, to hit 4.4 per cent in the 12 months to October, down from its previous forecast of 6.7 per cent. As Alejandro Fernández Beros, head of research, said in a note to clients:

With all this, the seasonally-adjusted IMACEC will have been stagnant since last June, which is obviously worrying, since it changes the existing perception regarding a continuation of moderate growth in the second half of the year … If this is confirmed and inflation remains under control, the central bank could be lowering rates before expected.

All is not glum – retail sales rose 8.6 per cent year-on-year and supermarket sales 7.3 per cent in 12 months, noted Cristóbal Doberti, chief economist at BICE Inversiones. But the trend is down and as he said “what the data reveal is greater contagion from the current complications in the external sector”. He also cut his annual growth forecast by a percentage point to 6.4 per cent, followed by growth of 4.5 per cent next year.

Chilean authorities say the economy is solid and well prepared. But their warnings – that turbulence will continue to be felt for some time yet – came true in the shape of Tuesday’s numbers.

Related reading:
Mexico and Chile to cut rates? A warning for the doves, beyondbrics
Chile: Beware the middle income trap, FT
Piñera: lame duck president?, beyondbrics
Chile: growth cools but what will the central bank do?, beyondbrics

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