Struggling to move on
During September the IMACEC suggested a further acceleration in the recovery. Any resulting optimism should be tempered, however, by one-off factors. The performance of retail sales for September was atypically positive, favored by a temporary boost from the partial withdrawal of pension savings. In the case of manufacturing, it was because there were three additional working days compared to September 2019. Exports continue to be the Chilean economy’s strong point.
Business confidence again showed strong signs of improvement. Excluding mining, the aggregate index reached its highest level since the beginning of 2019. It is striking that, with the exception of construction, business confidence is now higher than before the social outburst of October 2019. Optimism tends to pertain to the situation of the country, rather than of the firm.
The labor market continued to show some progress in Q3. It is now clear that the deterioration of the labor market bottomed out by mid-year, but the pace of improvement is slow. In the latest rolling quarter, the unemployment rate fell from 12.9% to 12.3%, while measured against the potential labor force came to 27.8%, the lowest since the February-April rolling quarter.
As in September, October’s CPI surprised strongly on the upside, but even more so. Evidence pointed to a faster-than-expected normalization of several prices that had been affected by the pandemic. There are several examples. The unusual behavior of a large number of prices increases the difficulty of forecasting short-term inflation. For medium-term projections, the uncertainty also remains enormous.
After the results of last month’s referendum, in which an overwhelming majority voted in favor of writing a new Constitution, the prices of financial assets did not undergo relevant changes. This is largely because public finances continue to be solid, and because the Central Bank maintains ample liquidity. Recent events have increased volatility in local financial markets. Against this backdrop, the Central Bank has placed considerable emphasis on uncertainty. Under the current circumstances, it is difficult to have strong convictions on directional trades in financial markets.
A second bill that would allow Chileans to withdraw up to 10% of their private pension savings (AFPs) is making its way through Congress. Supporters say it is the only plausible measure available to help those suffering from the economic effects of the pandemic. Critics say it is a regressive policy that not only benefits wealthier Chileans, but reduces pensions in the long run, possibly forcing future governments to make up the difference. Many suspect the real motivation is to slowly erode the AFP system altogether, creating greater pressure for a public social insurance system.
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