A fast but uncertain recovery
Economic activity continues to be hit hard by the pandemic, but seems to be recovering faster than expected. In July, the Monthly Index of Economic Activity (IMACEC) surprised on the upside. In line with the IMACEC, the gradual recovery in retail sales continued in July, and the result surprised even the most optimistic of the analysts. The recovery process should speed up in August. In July, the 12-month variation of manufacturing production improved from -8.4% to -7.2%, far better than the -13.7% recorded in May. Behind the aggregate indicator, though, is a wide dispersion by sector: here there was no unequivocal upward trend as there was in retail sales. Mining operations have continued, despite the risks generated by the spread of the virus in the north of the country.
In August, and for the second month in a row, there was a slowdown in bank credit. Following the initial positive effect of policies supporting credit to businesses affected by COVID-19, a change in trend is beginning to take shape. This slowdown raises questions regarding the sustainability of the recovery process. In August, a deepening of the dive in consumer credit was observed, which is certainly bad news for the outlook in retail sales. Mortgages also continued their downward trend.
In international trade, the most outstanding result during August was the negative 12-month variation in the value of exports. While most export items have experienced strong contractions due to the pandemic, mining showed moderate expansion in recent months. However, this situation changed in August. The main suspect is an increase in inventories that could prove temporary. There was additional deterioration on the import side as well. There was some improvement, however, on the side of capital goods. The 12-month accumulated trade balance continued to rise, exceeding $11 billon, the highest since 2011.
INE's May-July (rolling quarter) labor market data showed additional signs of serious deterioration. Although lockdowns are gradually coming to an end, the labor market is definitely decoupling. For unemployment the upward trend of previous months persisted, surprising even the most pessimistic analyst in the Bloomberg survey. Approximately one in three people of working age who would like to be working are not employed. The data suggests that lower-quality jobs have been most affected. Wages have been seriously affected by COVID-19 as well.
August’s CPI brought no surprises. The details continue to show the existence of supply and demand shocks derived from the social and economic measures associated with COVID-19, as well as measurement problems. Although the 12-month variation of CPI continued its moderate downward trend for the third consecutive month, for various core measures it rather showed slight increases. The partial withdrawal of pension funds seems to have had an upward effect on the price of a few products.
The market delivered a hawkish reading of the Central Bank’s September Monetary Policy Report (IPOM). But, both the IPOM and the last Monetary Policy meeting communiqué indicate the intention to “maintain a high monetary momentum for a long time and increase it if necessary.”
Apparently, the Central Bank wanted to use the IPOM first and foremost to strengthen expectations about the recovery of the economy. There were three tools available to the Central Bank to encourage further rate reductions, none of which it used: the Monetary Policy Rate (TPM) could have been reduced; the Bank could have revised downward the estimates for trend growth and neutral TPM; and the IPOM could have been an opportunity for the Central Bank to announce the early start of intervention in the fixed income market through the purchase of government bonds. We must note, however, that the new law gives the Central Bank the ability to buy Treasury bonds in the secondary market solely for the purpose of preserving financial stability.
For years the drafting of a new Constitution was a rallying cry for the Chilean left. Yet when things became especially violent in November 2019, the political class, including parties of the right, came together to agree on a process for writing a new Constitution. A referendum is scheduled for this October 25th. Despite the cross-party agreement, support for the “Approve” campaign was far more widespread among the opposition than among government-side parties. Yet about a month ago, several high-profile right-wing politicians announced their support for “Approve.” Although risks and uncertainty remain, the fact that some right-wing politicians are actively campaigning for Approve increases the chances of a more balanced constituent assembly, and in the end, a more reasonable Constitution.
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