Chile’s awakening

CHILE - Report 17 Dec 2019 by Igal Magendzo, Robert Funk and Sebastian Siche

The economic effects of the protests that began on October 18th have been devastating. The social situation in Chile makes any projection highly uncertain.

The Imacec in October was as unfavorable as it was surprising. Considering that the demonstrations affected only 12 days of the month, our calculations suggest that the shock was approximately -12%. Retail sales were certainly the most affected: we estimate that the impact was about -20%. Business confidence went into free fall.

International trade data remained weak in November, though there was a less pronounced y/y decline than in October. This could suggest that, although the impact of the protest persists, at least it is not gaining in intensity. The most worrying news came from the fall in capital goods imports, strongly linked to investment.
We continue to see weakness in the labor market. The unemployment rate stood at 7%, only 0.1 pp below October 2018, and in line with expectations. Employment expansion was 1.2% y/y, reversing the unusual acceleration of the previous month. Future reports will probably show a significant unemployment rise. New laws could affect wages soon.

CPI in November surprised markets on the downside. The 12-month variation stood at 2.7%, the highest in a year. However, most core inflation measures showed stability.

The Central Bank (BCCh)’s new Monetary Policy Report (IPOM) in December opted for prudence, and presented as a base a relatively "benign" scenario that assumes an accelerated recovery in production starting in December, and a forecast for inflation that seems too high. In a way, the BCCh left it up to fiscal policy to deal with growth and unemployment, while monetary policy will concentrate on financial variables, especially the exchange rate. Keeping the TPM at 1.75% along with exchange rate intervention and an increase in fiscal stimulus is consistent with that approach.

We can posit three future scenarios. The first would be benign, with the current situation resolved within a few months. In a second, the social situation would stay more or less as it is now. There is a third possible scenario, in which the economy falls into stagflation. We present the second intermediate scenario as the base scenario. But there is extremely high uncertainty around all of our forecasts.

Responses to the crisis are essentially following three tracks. The political track has so far been the most successful, and focuses on the constitutional process. The second is economic, and here too efforts are being made. The third, the security track, is least promising, as the Chilean police have responded badly to public disorder, have been accused of human rights abuses, and show few signs of learning from their mistakes. Unless public order is restored, the other two tracks could be derailed.

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