Where Are the Green Shoots?

CHILE - Report 25 Nov 2014 by Igal Magendzo, Robert Funk and Alberto Etchegaray

Executive Summary

Economists have systematically revised downward their expectations for Chilean GDP growth for both 2014 and 2015. Though fundamentals point to a near-term recovery, there are no signs of this yet. The devaluation of the peso and the fall in the price of oil should help the industrial sector, especially producers of tradable goods.

Consumption continues to slow, according to partial indicators. There was some mildly positive news in the construction sector. Moreover, after five months of falling confidence in construction, the Monthly Index of Business Confidence (IMCE) rebounded in September and October. Yet exports don’t seem to be reacting to peso depreciation.

Labor market deterioration paused in September; after rising for four months in a row, unemployment dropped slightly.

In October 2013, the Central Bank’s monetary policy interest rate was cut for the first time in 21 months, from 5% to 4.75%, beginning a cycle of easing. The Bank’s recent communiqué was unambiguous in signaling that there would be no more rate cuts, and that the Bank now will move into “wait and see” mode. Most analysts believe there will be no more cuts, and that the monetary policy rate will remain constant at 3% for a very long time. The problem is that several conflicting sources of uncertainty will keep markets dizzy.

For a few months now, inflation has surprised on the upside. The 12-month variation of the CPI was very high in October. This is likely to be the peak. The government has provided some relief to (very) short run inflation. On November 18th, the government announced that gasoline at the pump would fall the next day by 7% to 8%.

The Asia Pacific Economic Community is an important forum for any Chilean president. Yet President Michelle Bachelet’s participation in the APEC summit in China confirmed the old axiom that all politics is local. Bachelet’s public appearances and statements focused on delivering the message that Chile remains a stable trading partner and investment destination.These statements have the advantage of showing the domestic private sector that Bachelet is not only concerned with political reform, but is also aware of the precarious economic outlook for Chile.
But the president also used the APEC summit to support a Chinese-Russian proposal for a Pacific Free Trade Agreement. This represents a shift away from the U.S.-backed Trans Pacific Partnership, which excludes China.

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