Cold but not freezing
The economy is growing at low rates, with neither signs of a recovery nor of an additional slowdown. In April retail sales came out looking relatively good, while other sectorial indicators pointed in the opposite direction. Business confidence suffered a considerable decline, while international trade data showed a rebound.
Confidence within the construction sub-sector reached a low similar to levels observed during the 2009 crisis. The real estate sector has been affected by a sharp fall in sales following the mini-boom of last year. This situation in the real estate sector was raised in the Central Bank’s June Financial Stability Report.
The overall data suggest that the unemployment rate will continue to increase in the coming months. Accordingly, the 12-month variation of wages and labor costs should continue its downward trend. Both nominal wages and labor costs remain flat so far this year.
The labor market is becoming increasingly important for the Central Bank. Not that the Bank has a dual mandate, but a tight labor market and dynamic wages are among the main reasons inflation has stayed high for so long.
We see signs that inflation is beginning to sag, responding to macroeconomic factors such as wages, the exchange rate, inflation of imported goods and lower economic activity. The 12-month variation of several measures of core inflation (including IPCSAE) fell in April. We believe this trend will continue. Nevertheless, we remain cautious, for several reasons.
The minutes of the May Monetary Policy Meeting confirmed that the Central Bank is waiting for more information to define the monetary policy stance. The discussion hereafter will focus on the monetary policy bias, which we believe will remain neutral in the absence of relevant shocks.
The June Monetary Policy Report did not bring much news. The most important change between the March and the June Reports is the sharp downward correction of investment prospects for this year. Both the growth and inflation projections in the latest Report remained virtually unchanged relative to the March Report.
On the political front, President Michelle Bachelet is drawing domestic and international criticism for her lawsuit against the news magazine Qué Pasa, in response to the publication of a transcript implicating her in a recent influence-peddling scandal known as the Caval Case. Although Qué Pasa probably exercised poor judgment – the witness providing the testimony is far from reliable and has a long record of misdeeds – the image of a president trying to silence journalists has been a communications disaster for Bachelet. The lawsuit has done little to dampen continued coverage of Caval and raises questions about the president's overall communications strategy.
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