A clear road ahead
In July, the Monthly Index of Economic Activity (IMACEC) once again surprised markets on the upside. Expectations for GDP growth continue to improve – this, despite that in May, the 12-month variation of retail sales fell sharply, coming in below the expectations of even the most pessimistic analysts surveyed by Bloomberg, and manufacturing production disappointed as well. In June, growth in exports and imports remained in the double-digit range.
The latest data on the labor market published by the National Institute of Statistics (INE) brought somewhat positive news. Even though the unemployment rate refuses to fall from 7.0%, job creation remained dynamic. In the 12 months to May, 174,000 net jobs were created, of which 92,000 were payroll jobs. The private sector’s creation of 112,000 jobs also stands out. Lately there has been a good deal of controversy surrounding the INE’s employment figures, particularly regarding payroll jobs and the role of the public sector. The numbers do not seem to match the information coming from pension fund managers.
The 12-month variation of the CPI came in at 2.55% in June, reaching more than 2.5% for the first time since May of last year. All three official core inflation measures (the IPCX, which excludes perishables and energy; the IPCX1, which, in addition, excludes tariffs and other highly indexed prices; and the IPCSAE, which excludes foodstuff and energy) increased by 1.9% in the 12 months to June.
The Central Bank kept the Monetary Policy Interest Rate (TPM) at 2.5%. The communiqué was moderately hawkish and continued to reflect strong discrepancies inside the Board. As expected, according to the Central Bank, the potential escalation of an international trade war, especially between the US and China, has become the main risk for the Chilean economy. The Central Bank reaffirmed its base-case scenario for the medium term delineated in the most recent Monetary Policy Report. This scenario contemplates that the TPM will not be raised before December. However, there is a chance that the first hike will occur in October.
Moody's downgrading of Chile's credit rating seems especially ill-timed, as copper prices have taken a tumble in recent weeks in response to a looming US-China trade war. In addition, both Codelco and BHP Billiton face strike action, further threatening not only Chile's copper production, but possibly its growth numbers as well.
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