COVID in action
Due to the early social isolation measures, and helped by a bit of panic, the Monthly Index of Economic Activity (IMACEC) contracted by 3.5% in the 12 months to March. Moreover, in March the seasonally adjusted non-mining IMACEC declined by 6.1% m/m. March retail sales, the first to capture the effect of COVID-19, scored a historic 12-month variation of -14.9%, the worst figure since the series began in 2005. The seasonally adjusted series fell m/m by an astonishing 14.3%, much more than the 8.6% contraction of October 2019. But the effect of COVID-19 on manufacturing activity in March was moderate.
April's international trade figures extended the weakness already seen a month earlier due to the impact of COVID-19. The sharp fall in the value of imports reflects the collapse of domestic demand. Meanwhile, the value of exports contracted 6.5% in the 12 months to April, similar to the 6.3% contraction recorded in March.
Though unemployment increased to 8.2% in Q1, this increase is in line with the seasonal behavior of the series. But the 0.7% 12-month variation in employment is the lowest since 2015. The unemployment rate may approach 15% in the April-June moving quarter. But the uncertainty behind the forecast is particularly high. March wage figures do not show anything like a COVID-19 impact. We think the main adjustment in the labor market will continue to occur through rising unemployment.
The 12-month inflation fell from 3.7% to 3.4%. If under normal conditions 10% of prices are regularly imputed, the figure rose to around 40% in April. Inflationary pressures remain contained. The 12-month variation in the CPI excluding foodstuff and energy (IPCSAE) fell from 2.5% to 2.3%. The products most affected by the fluctuations in the exchange rate rose moderately. The pass-through was offset by a collapse in demand, and for gasoline by the fall in international oil prices. As elsewhere, COVID-19 should imply upward pressure on the CPI in the short term and downward pressure in the medium term, although with greater than usual uncertainty.
The Central Bank implicitly told us in its last communiqué that it does not have the capacity to boost the economy any further. The Monetary Policy Rate (TPM) will remain at the technical minimum of 0.5% for a prolonged period. While the Central Bank is satisfied with the effectiveness of its policies, it has become more pessimistic. Monetary policy’s countercyclical capacity has reached its limit. The Bank will do its best to ensure that interest rates do not rise and that there are no liquidity problems. This implies that, if the Treasury decides to issue more debt, the Bank will take all necessary QE measures.
Being in opposition during times of crisis is difficult. If one is too critical of the ruling party, one can be accused of failing to support crisis resolution efforts. During this pandemic, the Chilean opposition has been especially negligent. Although it increasingly seems as if the Piñera government has not handled the COVID-19 crisis as well as we thought -- with the number of cases rising ever faster -- the opposition seems more focused on petty squabbles. So while trust in some government institutions has risen, public opinion continues to punish the opposition parties.
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