Cautious and gradual

CHILE - Report 11 Dec 2018 by Igal Magendzo and Robert Funk

Central Bank national accounts for Q3 show that economic activity has slowed significantly. This marks the end of the cyclical recovery. Consumption showed a clear and protracted deceleration, while investment remained relatively dynamic. Exports rebounded, after a slump of a similar magnitude in Q2, while imports contracted, after three months of double-digit growth. From here, GDP is expected to grow at about its potential, of 3%-3.5%. If that comes to pass, 2019 GDP growth should be around 3.6%.

Employment data has been improving all year, though unemployment has remained high. Apparently, this situation is turning around. According to the National Statistics Institute (INE), in Q3 unemployment stood at 7.1%, the highest Q3 figure since 2011. The 12-month variation of employment fell to 0.5%, the lowest level since the current survey has been producing data (2010).

On wages, we are absolutely blind. After the Central Bank disregarded the INE’s data, claiming it made no sense, the INE adjusted the series. According to the new data, wages have been more dynamic than we thought – but, given the magnitude and timing of the correction, we should keep taking the results with a grain of salt.

Twelve-month inflation fell from 2.9% to 2.8%, explained mainly by the fall in energy prices. We continue to detect much noise from unusual movements in some specific prices.

In its December Monetary Policy meeting, the Central Bank made its first pause in the tightening cycle initiated in October, after 17 months of maintaining the Monetary Policy Rate (TPM) at 2.5%. But, since the Bank raised the TPM in October, the medium and long-term peso rates have fallen. At a press conference, the Central Bank president defined “gradual” as 25 bp rises every other meeting.

The Central Bank’s diagnosis in its December’s Monetary Policy Report (IPOM) is generally reasonable. Growth, inflation and TPM projections didn’t change much from September’s report. The IPOM is unlikely to go a long way towards raising medium term rates and reducing the monetary impulse. This is mainly due to the fear that the IPOM manifests against the development of the international scenario.

The Bank is increasingly optimistic about investment. GDP growth slowdown and Q3 consumption could counterweigh the optimism about investment, but the Bank calls both transitory phenomena.

The death of a young Mapuche at the hands of Chile's carabineros raises several problems for President Sebastián Piñera. Besides bringing the ongoing conflict with the Mapuche community to the fore, the incident highlights problems with civilian control over the national police force. This, together with corruption scandals in the Armed Forces, only serves to further deteriorate citizens' trust in public institutions.

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