Leave those bad times to rest
Growth was again low in Q2. We expect some recovery in H2, due mostly to a base effect. But amid growing concern over global slowdown, and the most recent escalation of the U.S.-China trade war, we aren’t particularly optimistic about q/q expansion. This leads us to cut our 2019 GDP growth projection, from 2.6% to 2.2%.
Seasonally adjusted annualized GDP growth showed signs of improvement q/q, after the zero variation in Q1. But this oscillation was dominated by the mining sector. Variation in GDP excluding natural resources (mining, electricity, gas, water and fishing) fell over four quarters, and rose more mildly q/q than did total GDP. Household consumption growth y/y fell for the fourth consecutive quarter, and the q/q variation reached its lowest level since June 2017.
The positive note came from investment in construction, reflected in both gross capital formation and sectorial activity figures. But exports showed especially negative behavior. The current account deficit continued to expand, reaching its highest level since 2014. This occurs in the context of a significant contraction of exports, partly reflecting the fall in the price of copper.
Unemployment in Q2 remained stable and relatively high; job creation slowed; growth of employed wage earners was low; and private wage employment contracted. Wage growth moderated in June, reflecting a pause in 2019’s upward trend.
The CPI’s monthly variation in July was in line with market expectations. The 12-month variation fell from 2.3% in June to 2.2% in July. We expect inflation to remain near these figures for the next three months, before temporarily rising, helped by a base effect and an increase in electricity tariffs. Core inflation indicates that inflationary pressures, although contained, showed no signs of further weakening, despite the deterioration of economic activity.
The minutes corresponding to the last Monetary Policy meeting, together with recent global events, increase the probability that before yearend the Monetary Policy Rate (TPM), currently at 2.5%, will fall to 2%, or even 1.75%. A 50 bp cut at the next board meeting in September is highly likely. The reasons for not lowering the rate in July were purely communicational. It is widely accepted that the Central Bank’s projections published in the last Monetary Policy Report were too high.
Chileans are debating two proposals that would cut the work week to about 40 hours. While experts debate their merits, what is most striking is that the Sebastián Piñera government is once again responding to an agenda being set by the very two women who, eight years ago, were student leaders making demands on the president’s first government. The underlying problem remains the government's inability or unwillingness to work with Congress to get legislation passed.
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