High expectations, but beware of the hurricane
According to the Monthly Index of Economic Activity (IMACEC), the Chilean economy expanded by a meager 1.6% in 2017. Nevertheless, the fourth quarter of last year marked a turning point. According to the Central Bank, the leading sectors were once again commerce and services, coherent with the stability seen in consumption.
Business confidence improved sharply in January, supported by the election of market-friendly Sebastian Piñera (to take office on March 11) and the relatively high price of copper. In January the Monthly Index of Business Confidence (IMCE) returned to optimistic terrain for the first time since March 2014. It is worth noting that there was a broad improvement in the perception of the future of the economy as well as in investment perspectives. That notwithstanding, we still see no clear signs that investment is picking up.
International trade started the year in a good mood. The value of both exports and imports registered double-digit 12-month variations in January. The 19% yoy increase in the value of consumer goods imports in January stood out. The trade balance recorded a relatively large surplus of 1.2 billion US dollars in 2017.
In Q4 2017 the unemployment rate was the highest for a fourth quarter in six years, rising to 6.4% from 6.0% in Q4 2016. But to a great extent the increase in unemployment was due to the acceleration of growth of the labor force. Nevertheless, among the sectors that generated more jobs during 2017 were education and public administration and national defense, while retail and manufacturing lost the most. This is certainly not good news as the public sector is playing a major role in keeping the labor market active.
The monthly variation of the CPI in January was 0.5%, while expectations implicit in market prices stood at 0.3%. The 12-month variation was 2.2%, slightly above the lower end of the 2-4% Central Bank target range. The 12-month variation of virtually all measures of core inflation fell. For the moment, the most likely scenario is that inflation will remain around 2% for the first half of the year before beginning a slow convergence to 3%.
As expected by most market agents, at its most recent Monetary Policy Meeting the Central Bank unanimously kept the Monetary Policy Rate (TPM) at 2.5%. The policy stance became practically neutral, with a very slight downward bias. If there is no significant and persistent fall in inflation that jeopardizes the anchoring of medium-term expectations, the TPM will not fall from its current 2.5%.
On the political front, the Carabineros (the Chilean national police) faces one of its biggest crises ever, after district attorneys accused the unit investigating arson and other attacks in Southern Chile of having manipulated evidence that led to the arrest of eight Mapuche activists. As more details of the case emerge, the Carabineros look inept at best, and corrupt at worst. The damage goes beyond the Carabineros itself; the case contributes to the continuing de-legitimization of Chilean institutions, weakening the country's democratic wellbeing.
Bachelet´s most emblematic reform has been, in practical terms, rejected by Congress. Will the Piñera government, which takes office in March, continue with the process of pension reform? Will it change its contents? What would be the effects on the system?
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