Clearer Waters Rising
Executive Summary
It is fair to say that the winds are starting to blow in the direction of a recovery in coming quarters. The wide agreement around the main points of the tax reform is good news. But, at the same time, it is hard to agree with some economists that claim that they are beginning to see some “green shoots”.
Retail sales continue to moderate, which can give way to a fall in inventories during the third quarter of the year, as well as a fall in prices. On the investment front, the recent figures for the imports of capital goods look like “green shoots”, but it might be only an illusion. The rebound is most likely transitory. Also, we do not see signs of recovery in the construction sector neither.
The Ministry of Finance revised its growth perspectives for 2014 from 3.4% to 3.2%. Under this revised scenario, the Ministry calculates that in 2014 there will be a fiscal deficit of about 2% of GDP.
The economy decelerates, but unemployment does not go up. This is definitely a puzzle. Or isn’t it? Unemployment is not increasing, but that is because both employment and participation are going down at the same time. Moreover, the quality of jobs is deteriorating.
Inflation started to fall in June and the Central Bank decided to lower its guiding interest rate by another 25 bps in its July. The decision not to cut rates in June was not unanimous, which is a rather rare event. It is highly likely that the inflation rate will stay slightly above 4% until year-end.
It was clear from the beginning that President Bachelet’s ambitious reform agenda would attract criticism from the opposition. What has been more surprising is the discussion and debate within the government coalition.
The debate is centered so far on the education and tax reform proposals, both of which have attracted considerable criticism from some members of the Christian Democratic Party.
The question is, what does this internal dissent mean for the future of Chilean politics? One view is that the only thing that keeps this diverse political quilt together is Bachelet’s personal popularity. Another, more institutional view, is that another reform being proposed by this government –changes to the electoral system– will make the Nueva Mayoría’s survival more difficult.
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