Waiting for the Sun

CHILE - Report 21 Jan 2015 by Igal Magendzo, Robert Funk and Alberto Etchegaray

Executive Summary

Time and again, economists have revised down expected growth for 2015, this time, from 2.7% in December to 2.6% in January (Central Bank's Survey of Economists). The Imacec (monthly index of economic activity) expanded a meager 1.3% in the 12 months to November, while the yoy growth rate of employment rose for the third month in a row.

There is one green shoot: imports of capital goods. From August 2013 to November 2014 the 12-month change of this variable was in negative territory, with the exception of March and November of last year. December was different: +24.4% yoy. Nevertheless, this was a lonely positive sign. Other indicators, such as imports of durable goods, business sentiment, or credit expansion are flat or worse.

Similar to November, in December gasoline had a significant negative effect on inflation. Unlike in previous months, there is now some evidence of lower underlying inflationary pressure. As for the prices of the goods subject to tax increases, the transfer of higher excise taxes seems to be over for beverages, as we envisaged. It is not clear it will continue for cigarettes, nor is it clear that it will be significant for vehicles.

In its most recent Monetary Policy Meeting, the Central Bank kept its monetary policy interest rate at 3%, as widely expected by market analysts. The communiqué reaffirmed the Bank’s “wait-and-see” stance, but changed substantially with respect to the previous statement. In particular, references to external financial and labor market conditions reappear.

Thomas Piketty, celebrated by the chattering classes, gave a “thumbs up” to the Bachelet government’s agenda of tax increases and educational reform in his recent visit to Chile. Piketty was at pains to repeat that he is not an expert on Chilean history or politics. This means that he is probably only vaguely aware that Chile has reduced poverty from 40% in 1990 to roughly 15% today, among other achievements.

There is one point which Piketty does get right, however – when they were at an equivalent GDP per capita, European countries’ tax take was about 10 percentage points higher than Chile’s today. Piketty believes the Chilean tax hike will have little or no effect on economic growth.

Piketty is a social democrat, supporting a market economy and use of the powers of the (theoretically efficient) state to correct excesses, including inequality. This places him to the right of some members of the Nueva Mayoría coalition, but quite in tune with its proposals.

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