The country is on fire, but not the economy

CHILE - Report 14 Feb 2017 by Igal Magendzo

Chile is being pummeled by natural disasters. This time, more than one million acres of forest in the center and south of Chile have gone up in flames. Although the initial lag in the government's response may indicate some slow decision-making, the true culprit is a Chilean state woefully unprepared for major emergencies. Seven years after the tragic 2010 earthquake, Chile has demonstrated a lack of coordination and poor emergency planning, leading it to rely on foreign help and private donations to successfully deal with the fires.

All in all, the fires will have a tiny macroeconomic effect. A bigger effect could be at work elsewhere: on February 9, the workers of BHP Billiton’s Escondida, the largest copper mine in Chile (accounting for about 5% of world production) went on a legal strike.

While the forests are burning, economic activity is frozen. This, even though the December Monthly Index of Economic Activity (IMACEC) was relatively positive. Based on the IMACEC, the economy grew just 1.5% in 2016, the worst performance since the 2009 crisis. In the last quarter of 2016, the q-o-q variation of the seasonally-adjusted IMACEC, excluding the (highly volatile) mining sector, was negative.

In line with other short-term data, confidence has recovered in recent months, but very modestly, so it still is a negative factor for investment and growth.

Both export and import data for January were more moderate than in previous months. The monthly expansion of both imports of consumption goods (excluding cell-phones) and capital goods (excluding “Other transportation vehicles”), both good indicators of the economic cycle, showed a deceleration.

Last year the labor market experienced an evident cooling, despite the low rates of unemployment. These low rates were explained by the combination of an increase in "alternative" employment and a slowdown in labor force growth. Not only was total employment growth slight (or negative, depending on your definition), but the public sector did most of the heavy lifting. The recent evolution of wages has mirrored the weakening of the labor market, and the slowdown in wages implies lower inflationary pressures.

Contrary to last month, the January CPI surprised the market on the upside, and significantly so. Judging by the behavior of different indicators of core inflation, the data might seem to reveal a certain resurgence of inflationary pressures. However, not all indicators point in the same direction. Therefore, while the January CPI showed a mild reappearance of inflationary pressures, this is not necessarily a resurgence. Inflation will continue to decline, but at a slower pace than previously expected.

After the split vote in December, in January the Board of the Central Bank unanimously voted in favor of cutting the Monetary Policy Rate (TPM) by 0.25bps to 3.25%. The radically opposite positions of two board members (most likely Pablo Garcia and Joaquin Vial) is interesting. One member applauded the option to bring the TPM to 3.0% at once. The other called this option "inappropriate". Although the next 25bps cut is almost certain, the one that follows will be strongly data-dependent, and especially dependent on the behavior of inflation expectations.

In this issue, we also highlight how emblematic cases regarding the abuse of consumer-protection regulations on the part of several companies has placed the National Consumer Service (SERNAC) in the spotlight. Amendments to existing regulations are already in the works, but are they a good idea considering the already weak state of the Chilean economy? What are the options?

Now read on...

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