Slow Motion
Executive Summary
In our base case scenario, the economy will grow approximately 1.7% in 2014 For 2015, uncertainty is huge and tilted to the negative side. Lately, the international scenario has become increasingly volatile, and that is dangerous for a small, open, flexible-exchange rate economy such as Chile. Furthermore, the reform agenda and the political environment, with their effects on confidence and expectations, are additional sources of uncertainty. Last but not least, the size of the fiscal stimulus depends upon the capability of the government to execute the budget and its ambitious investment plans. We believe GDP growth next year will be between 2.25% and 2.75%, coherent with a slow recovery.
On the inflation front, the next few months will be strongly affected by the fall in the price of gasoline, partially offset by the devaluation of the currency. This, together with domestic deflationary pressures, will bring inflation below the Central Bank’s 3% target in the second quarter of 2015, where we think it is likely to remain for the rest of the year. We expect annual inflation to be below 2% in December 2015 and then accelerate in 2016, ending the year slightly below 3%. Given our inflation and growth forecasts, our base case scenario is that the Central Bank will engage in a new cutting cycle. In that scenario, the monetary policy rate will decline between 50bps and 100bps, depending on the severity of the situation in the next few months of 2015.
Many relevant factors introduce important degrees of uncertainty to our scenario, both on the positive and the negative sides. These include growth in China and the price of commodities (especially copper), global and local effects of the normalization of monetary policy in the US, contagion from crises in countries or large (interconnected) companies exposed to the price of oil or to the European cycle, deflation in the developed countries, and domestic business and consumer confidence related to the reform agenda. But what we have re-learned in the last few years is that uncertainty, volatility and unexpected events are normal, and that small, open economies are especially exposed. Fortunately, Chile has a solid fiscal financial situation, a strong financial sector and an independent Central Bank. These are important strengths in this very uncertain world.
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