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CHILE: DECLINE OF A LATIN FORTRESS?Life in Latin America's safe haven is getting more precarious. Chile is slipping into recession as high interest rates, low commodity prices, and the fallout from the Asian crisis hit one of the region's fastest-growing economies. In the third quarter, Chile's real gross domestic product grew by 2.7% from a year earlier. That's down sharply from 5.8% in the second quarter, and the lowest yearly growth rate since 1990 (chart). Exports accounted for almost all of the increase. Domestic demand edged up just 0.5% from a year ago. Moreover, the data for this quarter look even poorer. Retail sales fell 6% in October from a year ago as the high cost of credit cut into demand for furniture and other durable goods. The unemployment rate rose from 6.8% in September to 6.9% in October, a two-year high. And October's industrial output was down 6.8% from a year ago. Chile's GDP is probably shrinking in the fourth quarter. That suggests the economy will fall short of the government's target of 4% growth in 1998. Private forecasts put 1999 growth at less than 2%. Chile grew by more than 7% in both 1996 and 1997. In response, the central bank has begun to cut interest rates after it hiked them earlier in 1998 to defend the peso. On Nov. 24, the bank lowered its overnight lending rate from 10% to 8.5% above the inflation rate, which was 4.3% in October. It was the third large cut in seven weeks. Even so, Chile still faces problems. The jobless rate is expected to go even higher in coming months, which will hold back consumer spending. And businesses are cutting their capital budgets as falling stock prices and still-high interest rates make it difficult to finance capital investments. One bit of good news from the slowdown is that softer domestic demand is slowing imports and improving the current account deficit. Real imports last quarter were flat from their year-ago levels. And the current account gap, which will likely exceed 7% of GDP for all of 1998, may shrink to about 6% to 6.5% of 1999's GDP.
BY JAMES C. COOPER & KATHLEEN MADIGAN RELATED ITEMS
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Updated Dec. 3, 1998 by bwwebmaster
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