Give me some doughnuts
The Monthly Index of Economic activity (IMACEC) in December surprised strongly on the upside, and provided a slight upward bias to our 2021 growth projection of 6.5%. The monthly variation of the seasonally-adjusted series excluding mining was 4.4%, the best result since September 2020. According to the IMACEC, economic activity in 2020 contracted by 6%. Retail sales in December were not particularly encouraging. Although sales are still significantly above pre-pandemic levels, there was a decline in December. The decline in retail sales occurred despite the second pension savings withdrawal. The best news, however, came from the buoyant price of copper. The big question is whether this historically high price is part of a new “super cycle.”
The labor market recovery continued as 2020 drew to a close, but at a slower pace than in previous months. As we have pointed out before, the labor market recovery has lagged behind the general economic recovery. Since the peak in the June-August rolling quarter, the unemployment rate has declined by about 3 pp. Sectoral data continue to show progress at different speeds. The impact of the pandemic continues to be severely felt in the wage bill. In real terms, the 12-month variation remained at around -10%.
The CPI for January 2021 surprised strongly on the upside. The 12-month variation reached 3.1%, above the center of the Central Bank’s 2% - 4% target. In general, we do not see significant inflationary pressures. Price uncertainty will be particularly high in the coming months.
The minutes corresponding to the last Monetary Policy Meeting (on January 27th) were dovish, with an emphasis on non-conventional measures. In a sense, this is a recognition that to some extent monetary policy has been at least partially subordinated to government efforts. In this context, inflationary concerns take a back seat, at least for now. It is clear that the Central Bank will be more tolerant of inflation than it has been historically, at least this year. As long as we do not see a restart of credit flow to firms (and possibly households), the Central Bank will keep the monetary policy rate at 0.5%, and will seek to adjust the instruments through which it provides liquidity.
The race for electing members of the Constitutional Convention has officially begun. Candidates are legally allowed to buy advertisements on Facebook, and to stand on street corners handing out flyers. One hopeful is even handing out jelly doughnuts. Beyond COVID, the campaign suffers from two main problems. First, for years the push for a new Constitution has been focused on organizing a Constituent Assembly. But very few of the candidates, and even fewer Chileans, appear to have thought through what a new Constitution should actually contain. The second, related point is that the size of the candidate pool for the April 11th election makes it very difficult to discuss real proposals. There will be 1,250 candidates for the Assembly alone (not counting contenders for the municipal elections held on the same day), organized into some 70 slates, plus indigenous candidates. To stand out, parties have been tempted to go for name recognition: for actors and models -- and also for doughnuts.
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