Going with the Flow
Economic activity in 2018 ended on a rather negative note. Activity re-accelerated in Q4, especially in non-mining, though growth velocity was well below that of H1. In January 2019, the Monthly Index of Economic Activity was hurt by very unusual and heavy rains in the Atacama Desert, supposedly the world’s driest, where a big chunk of mining production takes place. But even without considering mining, activity was disappointingly flat.
Retail sales in January delivered a strong negative surprise, and were practically flat y/y. This continues the consumption slowdown that began in H2 2018. The results were mostly driven by sluggishness in car sales. Manufacturing was also weak, though the dynamism of machinery manufacturing is consistent with more dynamic investment. In February, for the second consecutive month, the business confidence survey showed positive results.
International trade figures for January showed a recovery in exports, and some deceleration of imports. As in previous months, contraction in the value of mining exports was offset by improvement in agriculture and industry. The trade balance surplus increased in January, in line with the seasonal pattern, but the 12-month accumulated surplus declined.
Our reading of the latest National Institute of Statistics (INE) labor market data is unfavorable, though INE data must be taken with a big grain of salt. Unemployment increased, and employment was lethargic.
For the second consecutive month, the CPI in February surprised slightly on the downside. We don’t see substantial inflationary pressures. The 12-month variation has been falling, from 2.1% in December to 1.8% in January to 1.7% in February, though the 12-month variation of core inflation has continued to rise.
The Central Bank’s original plan, to raise the Monetary Policy Rate (TPM) every other monetary policy meeting, is losing credibility. The diagnosis presented by the president of the Central Bank before a business forum did not differ greatly from the one outlined in the last Monetary Policy Report. But market expectations don’t contemplate an increase of the TPM in May, and it is well known that the BCCh dislikes surprising the market. The “mirror” game between the Bank and the market is becoming more evident than ever. Not only has the Central Bank lost some control over domestic monetary policy, but it’s barely having any effect on medium and long term interest rates.
Sebastián Piñera's government spent the summer trying to control fallout from one crisis after the next, leaving the impression of a government unable to get ahead of events. Though deep divisions among opposition parties should offer the government a chance find legislative allies, there are few signs of this happening; rather, Piñera is facing further losses in popularity.
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