Unemployment falls as Chile's economy matures.

The graph above illustrates an interesting development in the Chilean economy. Starting around June 2006, the unemployment rate (the yellow line in the graph above) began a steep decline, which continued into December 2006. At the same time, Chile's Monthly Indicator of Economic Activity (Imacec) (the light blue line) was also in decline. The most recent statistics (January 2007) from Chile, show a noticeable increase in the indicator.

In fact, a slowdown in the Chilean economy had been widely reported in the international financial press during the final months of 2006.

To underscore that reporting, Dow Jones via its Market Watch website reported on January 12, 2007, that the Central Bank of Chile cut its key lending rate from 5.25 percent to 5.0 percent. Dow Jones noted that the rate cut was a surprise and that it came after months of rate tightening. The Central Bank of Chile in its statement on the rate cut noted a "slow recovery" in the economy-an opinion mirrored by the Imacec.

The idea of falling unemployment during a time of slowing economic activity is on the surface counter intuitive.

The graph on page 1 clearly shows a more plausible scenario during the first half 2006. As economic activity waned, unemployment increased. But then as economic activity declined further in 2006, unemployment declined as well.

More than likely, because Chile's economy is so heavily dependent on exports-particularly from its extractive industries, copper especially-falling global prices for minerals have pushed the index lower.

The lower unemployment rates, which are predicted to persist into 2007, may reflect Chile's efforts directed toward diversifying its economy to lessen dependence on imports for consumer products.

So the seeming anomalies depicted in the page 1 graph are reflecting Chile's movement toward a more mature market economy.

This progress is also highlighted by the government's ability to control inflation. According to International Monetary Fund (IMF) estimates, the rate of inflation in Chile grew 3.1 percent in 2005, 3.5 percent in 2006, and is expected to grow only 3.1 percent in 2007.

In a January 19, 2007 conference call, the Chief Economist of the Central Bank of Chile said, "Our report stresses the fact that headline and core inflation have dropped to levels between 2% and 3%, significantly below our forecasts of September [2006] and earlier. This development seems to have responded to a lower-than-expected oil price, an unforeseen larger output gap due to lower growth in 2006 and reduced cost pressures."

In a sign of increased consumer spending, an undated report by the Central Bank of Chile describing second half 2006 economic performance said, "Although beginning to slow down, household credit continues to grow within a heavily competitive scenario."

Undoubtedly, the growth in credit and the favorable implication for consumer spending are in part the result of the improving employment situation in Chile. Better employment prospects are routinely shown to count heavily toward enhanced consumer confidence.

The IMF predicts that Chile's GDP growth rate will increase from 5.2 percent in 2006 to 5.5 percent in 2007.

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