Economic stagnation meets polarized elections
Since February 2023, the Chilean economy has grown at an average rate of about 2.5%. The path, however, has been marred by sharp swings. July’s Monthly Index of Economic Activity (IMACEC) rose 1% m/m (sa) and 1.8% y/y, recovering part of June’s drop. Health services led July’s rebound. This is most likely a one-off. Business confidence remains firmly in pessimistic territory, while the trade balance appears to be on a path of slow deterioration.
Labor market data brought some relief at the margin as the May–July unemployment rate surprised to the downside. Still, unemployment remains relatively high, and the broader picture is one of a stagnant labor market. Real wages fell in July after the upside CPI surprise, but are still 0.8% above May levels. September’s IPOM highlights the significant impact that the minimum wage hikes and the reduction in working hours have had on wages and employment. This discussion has already affected the political debate, since as labor minister top presidential contender Jeannette Jara was the driving force behind these measures.
August’s CPI surprised sharply to the downside: the 12-month variation dropped to 4%, its lowest rate since September 2024. Excluding electricity, annual inflation slipped to 3%, a rate not seen since March 2021. Uncertainty about CPI monthly prints only deepened. The BCCH raised its short-term forecasts for both headline and core inflation, narrowing the gap with market projections and with our baseline, especially for this year.
The recent IPOM reinforces our base case: the BCCH is in “cautious, no rush, almost done” mode. The corridor for the TPM was modified again, and this time the surprise is that the next cut has been pushed back to December. The BCCH has swung from a hawkish stance in March to dovish in June, and has now returned to hawkish. We now project that it is as likely that the move will come in October or in December. The exact timing will hinge on the conditions right before the meetings. One point that stood out in September’s IPOM was the absence of an explicit change to the neutral TPM estimate.
With eight candidates running in Chile’s November 16th presidential election, a runoff in December is a certainty. Jara holds a narrow but stable lead, which pushes the real contest to second place. José Antonio Kast has long appeared the likely rival, consistently outpolling Evelyn Matthei. Yet support for the right-wing Kast is slipping. Matthei is not yet showing signs of growth, but has broadened her appeal, bringing in former center-left figures, and emphasizing ties with centrist parties. Her upbeat message targets moderate voters. Kast, meanwhile, faces headwinds from his faltering regional models Jair Bolsonaro and Javier Milei, and from an “emergency government” platform that raises fears of curtailed liberties. Whoever gets through to the second round is likely to win the presidency.
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