The economy is anemic, and the bottom is definitely deeper than previously thought. Retailers have been left with excess stocks. Though construction permits are very dynamic, actual activity in the construction sector, and home sales, is less robust. Imports of capital goods have also fallen sharply. And investment is suffering big time.
The labor market has been deteriorating. Since labor force growth has also slowed, unemployment has been relatively stable -- but that is changing.
Inflation is and will remain above 4% for several months, but should fall sharply –closer to the Central Bank's target of 3%-- during H2. July's CPI was above market expectations, but this doesn’t change recent inflation trends.
The Central Bank again decided to cut its monetary policy interest rate, by another 25 bps. It’s clear that the Central Bank will continue to ease. Now the question is where the cycle will end. Though the economy is anemic, and there are no clear inflationary pressures in the horizon, there are good reasons for the Central Bank to be nearing the end of its easing cycle. First, market real interest rates are at historical minimum. Second, inflation is persistently high. In the event of an inflationary shock, things could get nasty. Third, the currency has lost almost 10% of its value relative to the dollar this year; at 575/dollar, the peso is at its weakest since 2009.
The government appears to have decided to front-load the reform agenda. There are two reasons for this: one backward-looking, and the other forward. The backward-looking reason relates to political pressure. Looking forward, the government has analyzed the political calendar, and realized that it must get the ball rolling fast. Part of the criticism has fallen at the feet of Interior Minister Rodrigo Peñailillo, considered a favorite of President Michelle Bachelet’s. Peñailillo has had some success in electoral reform. But, he has also cut a much more public figure than many of his predecessors. Many suspect personal political motives, but the end result has been infighting, and lack of focus on pushing the agenda through. The problem is not loyalty to the president, or Peñailillo’s political skills (which are considerable), but the conflicting interests of the parties and groups in the governing coalition. These conflicting interests are not only ideological and programmatic, but also personal.
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