Economic recovery in times of political uncertainty

CHILE - Report 27 Jul 2021 by Igal Magendzo and Robert Funk

After falling for two consecutive months, in May the monthly variation of the seasonally-adjusted IMACEC was 2.6%, its largest since September 2020. The economy completely reversed the negative shocks of March and April. The detail by sectors shows diverging movements, underscoring the relevance of consumption in the recovery process. Retail sales’ seasonally-adjusted series marked a spectacular monthly variation of 26%.

Three factors coincided to lift consumption in May: more mobility, the third withdrawal and a successful “Cyber Monday.” In the third quarter transfers from the government will grow significantly, as the new universal Emergency Family Income (IFE) comes into effect. As opposed to the strong performance of the retail sector, manufacturing remained weak in May. Investment remains sluggish, as well. The 12-month variation of total exports reached 22% in June, a rise explained by a 40% increase in mining exports, driven in turn by a sharp increase in copper prices.

The labor market remains lethargic. Improving unemployment rate figures are misleading, because this result was due to a fall in the labor force, which in turn was due to the re-imposition of mobility restrictions combined with monetary transfers -- and not to an increase in employment. Employment fell for the third consecutive month, reaching its lowest level so far this calendar year. Data shows that the isolation measures have a greater impact on private formal workers relative to more informal jobs. Although consumption has been the main driver of the economic recovery, this is not a consequence of a robust labor market, but rather of fiscal stimulus and pension savings withdrawals. Nevertheless, in some sectors we do observe a significant increase in labor costs.

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