Turn and face the strange
IMACEC growth slowed in November, consistent with the fading of consumption momentum. Nevertheless, activity continued to grow above potential, contributing to inflationary pressures. Services stood out, but the emergence of the Omicron variant of COVID-19 constitutes a risk. We maintain a relatively favorable outlook for consumption, at least for H1 2022.
Business confidence continued to weaken in December. The indicator that excludes the volatile mining component plunged into pessimistic territory. The deterioration of sentiment seems to be generalized across sectors, although the biggest drop was in the construction sector. Possible explanations could be the increase in mortgage rates, stricter conditions for new loans and political uncertainty.
December's international trade data were favorable, with a record-high level of exports, although the continuous increase in imports is indicative of growing internal and external imbalances. Total exports reached a record high in December. However, the increase in exports was mainly explained by shipments of cherries, a seasonal and therefore transitory phenomenon. In December imports reached a new high as well. The annual trade balance closed 2021 with a high figure in historical terms, but the trend is downward, and most likely the drop will be accentuated.
The labor market continued gradually to improve in the September-November 2021 rolling quarter. Unemployment fell to its lowest figure of the pandemic period. The fall was helped by a slowdown in the growth of the labor force, and by seasonal factors. Employment continued to gradually increase in line with that of previous months. The gap with respect to the September-November 2019 rolling quarter (prior to the pandemic) fell to 4.3%. The participation rate is still low, and apparently is exerting downward pressure on wages. The recovery in wages has been slow compared to the vertiginous pick-up in inflation.
Once more the CPI surprised markets on the upside in December. The various core measures show that the increase in prices was fairly widespread. The recent increase in the price of services is noteworthy, consistent with consumption remaining strong, and shifting from goods to services. The depreciation of the Chilean peso is another factor that has placed upward pressure on inflation.
In its latest Monetary Policy meeting, the Central Bank increased the monetary policy rate by 125bp. The minutes were hawkish, and opened the door to another 125bp increase in the next meeting. A 125bp hike would be in line with the Central Bank's intention to bring the monetary policy rate quickly to a contractionary level. The December Monetary Policy report’s less hawkish base scenario is totally outdated.
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