The economy is slowly recovering after a significant slowdown in the first quarter. According to recently-released figures, growth picked up in Q2 thanks to robust private consumption, although investment was dragged down by weak activity in the construction sector. There are signs of a continuing recovery in Q3: In July, the economic activity indicator surged as a result of greater mining activity, and unemployment dipped, while business and consumer confidence both rose in August. On the political scene, President Bachelet was forced to reshuffle her cabinet following the resignations in August of Finance Minister Rodrigo Valdés and other members of the economic team. Although her government is approaching the end of its term, it still hopes to pass the 2018 budget
and a recently-announced pension reform in the coming months. The ministerial changes are unlikely to unduly hinder these legislative efforts, although they could play into the hands of center-right presidential candidate Sebastian Piñera, who enjoys a commanding lead in the polls.
Growth for 2017 as a whole will be held back by weak investment, previous disruptions in the mining sector and tighter fiscal policy. Next year, the economy should gain momentum thanks to greater mining investment and stronger regional growth. FocusEconomics Consensus Forecast panelists see growth at 1.5% in 2017 and 2.7% in 2018.
Inflation picked up from 1.7% in July to 1.9% in August. On 17 August,
the Central Bank maintained its policy rate at 2.50%, despite low price
pressures. Panelists foresee inflation remaining modest going forward,
LONG-TERM TRENDS | 3-year averages
2013-15 2016-18 2019-21
Population (million): 17.8 18.4 19.0
GDP (USD bn): 262 265 315
GDP per capita (USD): 14,689 14,380 16,598
GDP growth (%): 2.7 1.9 2.9
Fiscal Balance (% of GDP): -1.5 -2.8 -2.0
Public Debt (% of GDP): 15.0 23.8 29.5
Inflation (%): 3.5 3.0 3.0
Current Account (% of GDP): -2.6 -1.6 -1.9
External Debt (% of GDP): 57.2 63.2 58.5
due to a fairly stable currency and subdued domestic demand, ending
2017 at 2.5% and 2018 at 2.9%.
POLITICS | Cabinet reshuffle is unlikely to lead to a significant shift in
The appointment in late August of new finance and economy ministers, following the resignations of the previous ministers in protest at the government’s decision not to authorize the Dominga mining project, is unlikely to alter the country’s fiscal stance as it prepares for presidential elections in November. The new finance minister, Nicolás Eyzaguirre, has declared publicly that the 2018 budget—due to be presented in the coming weeks— will be “austere” and “fiscally conservative”. This would see the government build on the progress made in the 2017 budget in establishing a tighter fiscal position, in order to shrink the budget deficit and slow the rapid rise in the
public debt to GDP ratio.
Benjamin Sierra, Research Director at Scotiabank Chile, said: “It seems that he [Nicolás Eyzaguirre] will try to be more cautious and austere, trying to leave room to decide to the new government, instead of proposing excessive comments are in line with those made by former Finance Minister Rodrigo Valdés, who had previously talked of making “fiscal consolidation efforts” in
the upcoming budget.
The former finance and economy ministers left the government to protest the blocking of the Dominga mining project in the north of the country, due to environmental concerns. The project, valued at USD 2.5 billion, would have seen an important injection of money into the economy at a time when investment is still flagging. Benjamin Sierra argues these resignations could have a slight effect on the upcoming presidential elections: “It could have some negative impact on some limited areas of the center or center-left voters who might lean more towards the Christian Democrat candidate (Goic) or even towards to Piñera”. However, voters are much more likely to be swayed by the candidates themselves, and the policies they offer.
It is unclear whether the cabinet reshuffle will affect the legislative progress of pension reform, another key plank of the government’s agenda. In August, President Bachelet announced plans to raise employer pension contributions by five percentage points. Part of the money raised would go into a “Collective Savings Fund”, designed to boost the pensions of current retirees and the less
well-off. Pension reform has long been recommended by the IMF as a way of increasing replacement rates and ensuring sufficient retirement incomes, although there are some concerns over the potential impact on employment. Rodrigo Valdés had been heavily involved in drawing up the reforms, meaning there is a consequent risk of a loss of political impetus. However, President Bachelet remains committed, and according to Itaú Chile, the reshuffle could actually help the process along: “[The] fluid relationship between Mr. Eyzaguirre and the President could smoothen the discussion of key economic bills such as…the pension reform bill”.
REAL SECTOR | Chile’s economy is gradually on the mend, but growth in Q2 remains meager
Chile’s economy managed to crawl back to its feet in Q2, after registering in the prior quarter its worst performance since the height of the global financial crisis in 2009, on the back of a large contraction in the mining sector. GDP expanded 0.9% year-on-year (yoy) in Q2, which was an improvement from Q1’s 0.1% yoy growth but still marked one of the lowest figures in recent
years. The heady growth rates the country enjoyed until 2013 due to the commodities supercycle are now firmly a thing of the past, with the economy slowly adjusting to the lower-copper-price environment.
The expansion in Q2 was driven by robust domestic demand, with private consumption growth picking up pace (Q2: +2.6% year-on-year; Q1: +1.8% yoy). Consumers’ purchasing power was boosted over the quarter by lower inflation, while sentiment among households saw a sustained improvement in Q2 following several years in the doldrums. Signs of greater optimism were evidenced by a notable uptick in spending on durable goods. Public spending growth was fairly modest (Q2: +2.7% yoy; Q1: +4.9% yoy), as the government continued to pivot towards a less expansionary fiscal stance in order to reduce the budget deficit and slow the rise in the public debt-to-GDP ratio, as projected in the 2017 budget. However, fixed investment remained the Achilles’ heel, contracting for the fourth consecutive quarter (Q2: -4.1% yoy; Q1: -2.4% yoy). As has been the case in recent quarters, investment in construction dragged down the overall figure. Firms in the construction sector are reluctant to invest while the supply of homes remains at a multi-year high,
and there are signs that tighter mortgage requirements are deterring some
The external sector performed feebly in Q2, with exports of goods and services declining 3.5% yoy (Q1: -4.2% yoy). This was partly due to an overhang from the strike at the Escondida mine during Q1, as production at the site resumed only gradually during Q2. Imports grew 7.0% in Q2 (Q1: +4.6% yoy), with the net contribution of the external sector consequently deteriorating from minus
2.6 percentage points in Q1 to minus 2.9 percentage points in Q2.
Looking ahead, growth is forecast to pick up over the next few years. Improved business and consumer confidence, stronger regional growth and a loose monetary stance should all contribute to improving Chile’s economic performance. However, the process will be gradual, with fixed investment expected to remain weak this year and government spending growth constrained by the need to tame the fiscal deficit.
The Central Bank sees GDP expanding between 1.25% and 1.75% in 2017, and between 2.5% and 3.5% in 2018. Panelists participating in the LatinFocus Consensus Forecast see the economy growing 1.5% in 2017, which is unchanged from last month’s forecast. For 2018, the panel expects the economy to pick up speed and expand 2.7%.
REAL SECTOR | Economic activity indicator increases at a solid pace in July Economic activity rose 2.8% in July on an annual basis according to the Monthly Indicator for Economic Activity (IMACEC) published by Chile’s Central Bank, substantially overshooting analysts’ expectations of a 2.1% increase and coming in at double June’s 1.4% increase. July’s figure is a further sign that the economy is on the mend after stalling in Q1.
The mining IMACEC surged 5.2% in July, marking the first increase since January, as production recovered following the end of the mining strike at Escondida. The trade, service, fishing and manufacturing sectors also expanded, supporting the overall figure. On a monthly basis, economic
activity rose 0.9% in July in seasonally-adjusted terms, up from June’s revised 0.4% increase (previously reported: +0.5% month-on-month). Annual average economic growth picked up from 0.8% in June to 1.0% in July.
OUTLOOK | Business confidence rises in August The business confidence index (IMCE, Indicador Mensual de Confianza Empresarial) published by ICARE and the Universidad Adolfo Ibáñez rose
from 42.4 points in July to 43.2 points in August. The improved reading is in line with other signs pointing towards a gradual economic strengthening thus far in Q3. However, the indicator remains below the 50-point threshold that separates pessimism from optimism, where it has been since April 2014. Augusts’ increase came on the back of improving sentiment in the commercial, industry and mining sectors, which more than offset greater pessimism in the construction sector. The commercial sector reported a more positive outlook due to improved demand and general business conditions, while the mining sector grew more optimistic, despite the government’s controversial decision not to approve the multi-billion dollar Dominga mining project. The construction sector remains mired deep in pessimistic territory, with stricter mortgage requirements putting off potential homebuyers, while the industry sector became more optimistic thanks to improved expectations for the
Panelists surveyed for this month’s LatinFocus report expect fixed investment to drop 0.4% in 2017, which is down 0.2 percentage points from last month’s estimate. In 2018, the panel expects fixed investment to increase 2.9%.
OUTLOOK | Consumer confidence rises for sixth consecutive month in
The Adimark GfK consumer confidence index (IPEC, Índice de Percepción de la Economía) increased from 41.0 points in July to 41.1 points in August, marking the sixth successive monthly rise and meaning the index is now at its highest point in over two years. However, the index still remains entrenched below the 50-point threshold separating pessimism from optimism, where it
has been since June 2014. August’s uptick was driven by greater optimism regarding consumers’ personal situation, and consumers’ greater willingness to purchase household items.
This more than compensated for worsening sentiment regarding the country’s current situation and economic expectations over the next twelve months. Panelists participating in the LatinFocus Consensus Forecast expect private consumption to grow 2.2% in 2017, unchanged from last month’s forecast. For 2018, the panel sees private consumption increasing 2.9%.
MONETARY SECTOR | Inflation rises in August but remains below the Central Bank’s tolerance range
Consumer prices rose 0.2% in August compared to the prior month, matching July’s figure and coming in slightly below analysts’ expectations. According to the National Statistical Institute (INE), August’s increase was underpinned by higher prices for food and non-alcoholic beverages and housing and basic services, which more than offset lower transport prices.
Inflation came in at 1.9% in August, up from July’s 1.7% in July. As a result, inflation remains outside the Central Bank’s 2.0%-4.0% tolerance range for the third consecutive month. The market took this as a sign that further monetary easing could be in the offing, with the Chilean peso losing value against the dollar soon after the announcement. After stripping out volatile categories
such as oil, fresh fruit and vegetables, core consumer prices were flat monthon- month in August, contrasting July’s 0.4% rise, while core inflation was
1.9% in August, compared to 2.0% in July. After stripping out volatile categories such as oil, fresh fruit and vegetables, core consumer price pressures also continued to ease. Core prices fell 0.2%
in June, contrasting May’s 0.2% rise, while core inflation was 2.0% in June, down from 2.5% in May.
The Central Bank predicts year-end inflation of 2.4% in 2017 and 3.0% in 2018. FocusEconomics Consensus Forecast panelists expect inflation to end 2017 at 2.5%, which is down 0.1 percentage points from last month’s forecast. For 2018, panelists forecast inflation of 2.9%.
MONETARY SECTOR | Central Bank holds fire in August At its 17 August monetary policy meeting, the Central Bank of Chile (BCC) kept its monetary stance unchanged for the third consecutive month, opting to leave the policy unchanged rate at 2.50%. As was the case in July, four
committee members voted in favor of this decision, while one member voted for a rate cut to 2.25%. Consequently, the Bank maintains its loose monetary stance, which has seen the policy rate fall from 3.50% at the end of 2016 to its current level, the lowest of any country in Latin America.
The Bank’s decision came after inflation remained at 1.7% in July, thus staying below the 2.0%–4.0% tolerance range for the second consecutive month and marking the joint-lowest level in several years. The recent appreciation of the peso against the dollar, if maintained, could add further downward pressure to inflation going forward. At same time, economic activity remained fairly tepid in Q2 despite a slight uptick compared to Q1, with the construction sector looking particularly weak. This confluence of factors led the Bank to once again evaluate the merits of a rate cut to 2.25% in order to bring inflation back to target and prop up economy.
However, the BCC’s strong credibility in the market means there is little risk of inflation expectations becoming de-anchored; according to the monthly Economic Expectations Survey (EEE), the market’s medium-term inflation expectations still sit at the Bank’s 3.0% target. In addition, the BCC highlighted that despite disappointing headline inflation figures in recent months, underlying inflation had performed as expected, while weak economic growth in Q2 was due in part to temporary supply shocks and unfavorable base effects. As a result, the Bank opted to stay put, in order to allow time for
previous monetary easing to feed through to prices. The communiqué offered little forward guidance, although the Bank reiterated its neutral stance regarding changes to the policy rate going forward.
FocusEconomics panelists expect inflation to continue near the Bank’s 2.0% lower bound over the next few months, but then to converge to the Central Bank’s 3.0% target towards the end of next year. Faced with this scenario, and following substantial easing in recent months, the Bank is unlikely to
significantly alter interest rates for the time being, although the policy needle points towards a possible rate cut in the short-term. This is particularly likely if inflation over the next few months is lower than expected. In 2018, a modest tightening cycle should begin as the economy regains its footing and inflation picks up.
Panelists participating in the LatinFocus Consensus Forecast see the policy rate at 2.33% at the end of 2017. Panelists expect the policy rate to end 2018 at 2.85%.
EXTERNAL SECTOR | Copper prices soar in August Copper prices rose for the third consecutive month in August, reaching their highest level in well over two years. Copper prices averaged USD
2.95 per pound (equivalent to USD 6,493 per ton) in August, up 8.5% from July’s average price of USD 2.71 per pound. In annual terms, copper prices increased 36.8% in August.
Last month’s rise in prices was underpinned by further encouraging signs from China, the world’s number one consumer of the red metal, after manufacturing growth in the Asian giant accelerated in August. This follows the news which surfaced in late July that the Chinese government is considering a ban on imports of scrap, which could boost demand for other forms of copper, such as
copper concentrate or refined metal. Speculative buying has likely also played a role in buoying prices, with investors wagering that the rise in the number of electric vehicles will boost demand for the metal. Panelists participating in the LatinFocus Consensus Forecast expect copper
prices to average USD 2.72 per pound in 2017 and USD 2.83 per pound in 2018.
Enviado por Focus Economics - https://www.focus-economics.com/ - Desde Barcelona -España