No Good News, But Glimmers of Hope
The latest national accounts were unequivocal about the sluggishness of the economy during H1; we cannot find a single sign of recovery.GDP expanded just 0.5% y/y during the first semester, making it the worst half since H2 2009. Yet there are a few signs of improved expectations.
Strong domestic demand performance was mostly due to inventory accumulation. That could be reflecting improved confidence. The same could be inferred from the strong expansion spending on durable goods. Gross fixed capital formation continued to disappoint.
The external sector is not behaving much better. In Q2, exports of goods contracted for the third quarter in a row, y/y. The good news is that the price of copper has now surpassed 3 USD/₤ for the first time since November 2014.
Employment continues to improve. Yet this doesn’t suggest that the economy is recovering, as the public sector plays a relevant role. The 12-month variation in job creation has increased again; payroll jobs accelerated, while self-employment jobs decelerated. The expanded labor force explains why, despite the increase in employment creation, the unemployment rate did not fall, and remains at 7%.
The 12-month variation of headline CPI remained at 1.7%, below the 2%-4% target range. But there is no evidence of additional deflationary pressures, and great uncertainty over future inflation behavior.
In its August monetary policy meeting, the Central Bank kept the Monetary Policy Rate (TPM) at 2.5%, in line with expectations. Its statement was slightly dovish, indicating that the market's expectations of additional cuts will persist. Though the Central Bank is independent, presidential elections in November certainly are an issue. The August inflation number could be a game changer.
As she did during her first administration, Michelle Bachelet intends to end her second government with a major reform, once again involving legal changes that imply an increased role for the state – in this case, in Chile´s pension system. Will her next reform face a fate similar to Transantiago, the failed transport system she created during her last administration?
We’ve already been subjected to the spectacle of Alejandro Guillier, the ruling coalition’s candidate, claiming his campaign is essentially broke. Much of the blame lies with the Nueva Mayoría. Bachelet hurried to institute stricter, and ultimately unrealistic, campaign finance rules, which severely limit how much campaigns can raise. How ironic that Guillier should be their first victim. Ironically Sebastián Piñera, who as the front-runner has easier access to bank loans, also faces no limitations on spending his own money.
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