It’s all about the trade war
The economy continues to cool. The Central Bank has revised its projections for 2019 GDP growth downward for the third consecutive time. The forecast range has fallen from 3.25%-4.25% in December 2018 to 2.25%-2.75% with a downward bias in September 2019 (the Central Bank stretches its forecast range during the year). The government insists upon a totally unrealistic forecast of 3%. The consensus forecast stands at 2.5%, while our forecast is 2.2%, below the Central Bank’s floor.
The GDP cooling trend is consistent with July’s employment data, which were far from encouraging. The unemployment rate dipped slightly compared with the same month of 2018, and the 12-month variation of employment rose a bit. But the private sector payroll fell, and the share of self-employed workers in total employment increased. Moreover, unemployment remains high.
In its latest Monetary Policy report, the Central Bank revised downward by 0.1 ppt its inflation forecast for both December 2019 and December 2020. The forecast now stands at 2.7% for December 2019, and 2.8% for December 2020. Market expectations (implicit in CLP/UF forwards) are very similar.
We expect inflation over the medium term to be lower than these forecasts suggest. With the economy growing at below its potential, the labor market weakening and international inflation low, we see no reason inflation in Chile should converge toward 3% so soon, barring significant additional depreciation of the peso.
Forestry, agro and livestock continue to represent an important chunk of the Chilean economy, with over 50% of non-mining exports, and a 2016 total value of about $60 billion. The diversification of the Chilean economy, to the degree that it exists, is grounded largely on the success of these sectors over the last 40 years. Since most of these industries rely upon irrigation, water is an issue. Lack of water is an even bigger issue. This year has been the driest in six decades. Reservoirs are drying up, and government experts are measuring runoff quantities as the winter snows melt in the Andes. It doesn’t look promising.
As a result, the Chilean government has declared a water emergency in three regions, as well as in 17 municipalities in the Santiago region. There are 160 municipalities around the country depending upon trucks bringing in additional drinking water. In the Maipo, Cachapoal and Colchagua valleys, producers of some of the country’s finest wines, the drought is expected to reduce wine production by 25%.
In the short term, the drought may slice about 0.2 ppts off GDP for 2019, and push inflation slightly higher. The long-term trends are more troublesome. Some crops, such as fruit, are beginning to move from the central valley further south. Others, like avocados, which are lucrative but very water-intensive, may disappear altogether.
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