The economy appears to have performed well in Q3, albeit softening from the outstanding domestic demand-led outturn in Q2. Average economic activity came in below the Q2 level in July and August, reflecting a more challenging external environment and worsening labor market dynamics at home. Furthermore, average business sentiment deteriorated in Q3, although September saw a notable improvement compared to August, largely due to a surge in confidence in the mining sector. In a similar vein, average third-quarter consumer confidence was slightly below the average for Q2, against the backdrop of a weakening peso which weighed on consumers’ views regarding both their current and future economic situations. Nevertheless, despite the fall, retail sales jumped to a five-month high in August, signaling sustained reliance on household consumption. On the external front, exports fell marginally in August—the first contraction in 18 months—amid sustained copper price weakness and waning regional demand for Chilean exports.
• Solid domestic demand should underpin growth next year, although it is expected to decelerate slightly. A stable inflationary environment will bolster private consumption, which, coupled with strong investment growth, should drive growth in 2019. However, the likely worsening of the external backdrop—mostly due to weaker copper prices and regional instabilities—remains a major downside risk to the outlook next year. FocusEconomics panelists see GDP expanding 4.0% in 2018 and 3.5% in 2019, which is unchanged from last month’s forecast.
• Inflation came jumped to 3.1% in September (August: 2.6%)—the first time the headline inflation superseded the mid-point of the Central Bank’s 2.0%–4.0% tolerance range in two years. FocusEconomics panelists see inflation ending 2018 at 2.9% and 2019 at 3.1%, unchanged from last month’s estimate.
• At its monetary policy meeting ending on 4 September, the Central Bank held the policy rate stable at 2.50% in the face of generally well-anchored inflation expectations. The Bank, however, reaffirmed its hawkish guidance for the coming months, signaling that a rate hike by the end of 2018 is likely. Our panelists remain divided on whether a rate hike will happen by the end of the year, expecting the rate to end 2018 at 2.81% and 2019 at 3.63%.
• The Chilean peso recovered some lost ground in recent weeks, following a prolonged depreciation from mid-April through to the beginning of September amid the emerging-market selloff. On 5 October, the CLP traded at 676 per USD, a strengthening of 1.5% month-on-month. FocusEconomics panelists expect the peso to end 2018 at 656 CLP per USD, and 2019 at 644 CLP per USD.
REAL SECTOR | Economic activity growth broadly stable in August Economic activity rose 3.2% year-on-year in August, marginally down from the previous month’s 3.3% increase, according to the IMACEC monthly economic activity index published by the Central Bank of Chile. As a result, the index edged down to a fresh year-to-date low in August, pointing to a deceleration in the first two months of Q3 from growth in the second quarter. The print was broadly in line with the expectations of market analysts.
August’s reading was driven by strong non-mining activity growth offsetting a weak performance in the mining sector. The non-mining index rose 4.0% in annual terms in August (July: +3.8% yoy), bolstered by solid growth in the services and commerce sectors. Mining activity, on the other hand, continued to deteriorate in August: The mining index fell 5.1% year-on-year, down from 2.3% in July.
In seasonally-adjusted terms, economic activity fell 0.1% month-on-month in August, swinging from a modest 0.2% expansion in July. Meanwhile annual average economic activity growth edged up to 4.0% in August from 3.9% in July, marking a near four-year high.
The Central Bank sees GDP expanding between 4.0%–4.5% in 2018, and between 3.3%–4.3% in 2019. FocusEconomics panelists see growth of 4.0% in 2018, up 0.1 percentage points from last month’s forecast, and 3.5% in 2019, unchanged from last month month’s estimate.
OUTLOOK | Consumer confidence falls to one-year low in September The Adimark GfK consumer confidence index (IPEC, Índice de Percepción de la Economía) dipped to 46.1 points in September, from 47.0 points in August, marking the third consecutive month of deteriorating sentiment. As a result, the index slipped further below the critical 50-point threshold that separates pessimism from optimism among Chilean consumers.
September’s decline in consumer sentiment reflected the deterioration in three out of five components of the index compared to the previous month, which more than offset the improvement in the two remaining components. Consumers’ sentiment regarding the country’s stability over the next five years continued to weaken in September and remained deeply entrenched in negative territory. Meanwhile, consumers’ willingness to buy big-ticket household items fell slightly in September but remained above the 50-point mark, while consumers’ views regarding their current personal situation also fell marginally in the same month, languishing further below the threshold.
On a slightly more positive note, consumers’ assessment of the country’s current economic situation improved slightly in September, although fell slightly short of the 50-point threshold. Moreover, their views regarding the economic situation over the next twelve months remained well-entrenched in positive territory, improving marginally from August.
Panelists participating in the LatinFocus Consensus Forecast expect private consumption to grow 3.8% in 2018, which is up 0.1 percentage points from last month’s forecast, and 3.6% in 2019, which is unchanged from last month’s estimate.
OUTLOOK | Business confidence recovers lost ground in September The business confidence index (IMCE, Indicador Mensual de Confianza Empresarial) published by ICARE and the Universidad Adolfo Ibáñez rose from 50.8 points in August—the lowest reading so far this year—to 54.8 points in September, marking the highest print in three months. As a result, the index moved further above the crucial 50-point threshold that separates optimism from pessimism among businesses, where it has been since January. In August, three out of the four sectors surveyed were in positive territory.
Although the overall improvement in September was broad-based, the mining sector led the charge. Mining sentiment increased by 12 points in September and has recovered the ground lost in July and August against the backdrop of an improved perception of the current general situation among business and more optimistic output expectations. Meanwhile, the industrial sector saw confidence swing back to positive territory in September, after a brief dip below the critical 50-point threshold in August.
The increase in overall business confidence was further propped up by marked improvement in the commercial sector with sentiment up in September from August amid a markedly more favorable perception of the country’s economic outlook. Lastly, despite improving marginally from the previous month, sentiment in the construction sector remained entrenched in pessimistic territory in September where it has been since March.
Panelists surveyed for this month’s LatinFocus report expected fixed investment to expand 5.3% in 2018, which is up 0.1 percentage points from last month’s forecast, and 4.8% in 2019, which is also up 0.1 percentage points from last month’s estimate.
MONETARY SECTOR | Inflation jumps above the 3.0% mark for the first time in two years in September Consumer prices rose 0.3% from the previous month in September, up slightly from August’s 0.2% increase. According to the National Statistical Institute (INE), the increase in prices was primarily driven by higher prices for transport services, as well as for food and non-alcoholic beverages.
Inflation hit 3.1% in September—the first time the headline reading exceeded the mid-point of the Central Bank’s 2.0%–4.0% tolerance range in two years. Meanwhile, average inflation over the last 12 months edged up to 2.2% in September (August: 2.1%), marking the highest print in nine months.
After removing volatile categories such as fruit, vegetables and fuel, core consumer prices increased 0.1% month-on-month in September, up from August’s flat reading. Meanwhile, core inflation ticked up to 2.3% in September, from 2.0% in August.
The Central Bank predicts year-end inflation of 3.1% in 2018 and 3.0% in 2019. FocusEconomics Consensus Forecast panelists expect inflation to end 2018 at 2.9%, which is unchanged from last month’s forecast. The panelists see inflation ending 2019 at 3.1%, also unchanged from last month’s projection.
EXTERNAL SECTOR | Copper prices stable in September Copper prices stabilized somewhat in recent weeks after a near three-month long decline through to the beginning of September. Prices averaged USD 2.74 per pound (equivalent to USD 6,051 per ton) in September, broadly in line with the previous month’s result (August: USD 2.75). The average copper price in September was consequently minus 0.03% lower than in the same month last year.
Copper prices have recovered in the second half of September thanks to firming global demand for the metal as consumers recommitted to previously postponed purchases amid sustained robust economic growth in the world’s top economies. Crucially, China, the world’s largest consumer of copper, showed resilience despite the introduction of new U.S. trade tariffs. Reflecting the positive development, Chinese imports of copper ores recovered after a weak summer, buoyed by healthy real estate activity. Meanwhile, growth in the U.S. remained robust, further reassuring the base metals market which was also aided by a weaker U.S. dollar.
Meanwhile, copper exports in Chile, the largest copper-producing country in the world, fell 17.0% year-on-year in September. The marked drop in exports came amid lower global prices largely owing to U.S.-China trade tensions. In addition, the Spence copper mine in Chile was forced to partially shut down operations in mid-September due to a fire at the mine. This, coupled with news that Chilean lawmakers were proposing increasing taxes for all mining companies that extract more than 12,000 tons a year, likely weighed on copper prices in September.
The evolution of copper prices in the medium-term appears to be strongly related to the health of emerging-market economies. In the medium- to longterm, copper prices should trend upwards on solid global demand, largely stemming from the auto sector and related electric vehicle infrastructure. In addition, China’s Belt and Road Initiative is expected to drive additional copper demand in the coming years, adding further upward pressure to the price of the red metal.
Our panelists expect copper prices to average USD 3.00 per pound in 2018 and 3.02 in 2019.
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