Ready to grow

CHILE - Report 23 Jun 2017 by Igal Magendzo

The Central Bank kept the Monetary Policy Rate (TPM) at 2.5% at its June Monetary Policy Meeting. Likewise, the communiqué barely changed from May. The June communique corroborated the minutes of May’s meeting and the latest Inflation Report that 2.5% is a floor for the TPM. Only significant additional deterioration of the labor market and activity, or a significant deceleration of inflation could induce further cuts of the TPM. But if the Central Bank’s base case scenario occurs, we will see signs of a cyclical recovery by the end of 2017. By then, the bank will start shifting the policy bias towards a more hawkish stance.

Beyond monthly volatility, the year-on-year average variation for overall activity in the first four months of the year was 1.1%, which is consistent with our projection of 1.4% for 2017, implying that the economy will go from less to more, and that it is ready to grow.

Retail sales in April were weak, but that does not necessarily imply an additional deterioration. Sales of durable goods, led by automobiles, remain high, although they are showing a tendency to normalize. The manufacturing production index experienced a year-on-year change of -7.5% in April, although it was affected by three fewer working days than in the same month last year. Beyond the monthly volatility, manufacturing production has been flat over the course of the year. In May, business confidence was stable compared to April.

Labor market data show no further deterioration, but no recovery, either. The quality of employment is showing a marginal improvement: by category, the 12-month variation of self-employment slowed, while that of payroll employment accelerated, appearing in positive territory for the first time in five months. In April, the 12-month variation of the wage index remained relatively stable, caused by a labor market that remains weak but is not deteriorating further.

May’s monthly inflation was higher than market consensus, and the difference was concentrated in one particular product: “All-inclusive travel services”. It is obvious that there is a technical problem with how the price of this service is measured. Medium-term inflationary pressures paused, while the 12-month variation of the core-inflation measures did not fluctuate much.

An almost irrelevant conflict between Codelco and the Chilean government unleashed a major hidden conflict. The results will have systemic consequences regarding the relation of the central authorities and Chilean stated-owned companies and unknown consequences for the economy.

The Christian Democratic Party (CDP) has opted to field its own presidential candidate for November's elections, bypassing primaries. At the same time, it is trying to negotiate an electoral alliance that will allow its congressional candidates to be included in the Nueva Mayoría (NM) list. This dichotomy underscores the rocky relationship the CDP has had with the NM since its inception, as well as the centrifugal forces the new electoral law imposes on all coalitions.

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