(Far Too Much) Optimism
September monthly inflation was the lowest for any September since 1928, and pushed annual inflation down to 1.5%. But this unusual figure can mostly be attributed to three specific effects, so there’s no true fall in inflationary pressures. The 12-month variation of core measures remained stable.
The latest economic activity data is relatively positive, but we still don’t see clear signs of investment recovery. According to the Central Bank, economic activity was hurt by poor construction sector performance. But housing, dragging this year, is likely to recover in 2018.
Retail sales in August delivered a positive surprise, coming in at their highest since February 2016. The sales increase has been driven by the durable component. But manufacturing production reverted the incipient signs of recovery.
The Monthly Business Confidence Index improved substantially in September, to its highest level since May 2014. Confidence in construction stands out, with the indicator rising from 25 to 33.3. Expectations about future growth are also improving.
Trade balance news was also good in September. Export values turned in double-digit plus growth for the fifth consecutive month. Imports of consumer goods remained dynamic, especially durable goods, while imports of capital remained stable (which is not very encouraging).
June-August rolling quarter figures confirmed the positive labor market trend. Unemployment was 6.6%, just below expectations. But annual employment growth was at its highest since February 2014. Remuneration and labor cost indicators also showed positive behavior in August.
Bank credit remained sluggish. The Central Bank Quarterly Survey of Bank Credit reflects a more restrictive supply. But the perception of household demand for credit improved. A monetary policy “preemptive” action is no longer in the cards. Though September inflation had a strong impact on the Central Bank, it is unlikely to cut rates.
The 2018 Budget Law seems reasonable. It calls for a small rise in public spending, mostly geared toward ensuring financing for President Michelle Bachelet’s political commitments. Still, experts fear it is based on overly optimistic assumptions and projections that could force future governments to raise borrowing.
Sebastián Piñera seems likely to win in the first round of the presidential elections. So for the runoff the left, now divided into two main coalitions, is toying with the idea of cooperating in an anybody-but-Piñera coalition. Long-standing divisions make this complicated, and will lay the foundations for the direction of leftist politics in Chile.
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