Green Shoots at Last?
Given the tone of September’s Central Bank Monetary Policy Report, we think it’s extremely unlikely that the Bank will cut rates further. Still, the IPOM introduced a downward bias for the short-term inflation forecast. A further fall in inflation could be a game changer, but the closer we get to the November presidential election, the harder it will be to cut rates. The Bank did introduce a few changes to the Monetary Policy meeting, though.
The Monthly Index of Economic Activity (IMACEC) of July could be signaling a more sustained recovery in activity. July retail sales data were moderately positive, too – so the consumption dynamism continues to be relatively stable. Manufacturing also surprised on the upside. The mining sector showed the first positive y/y variation, its highest since January 2015. In August, the Business Confidence Index (IMCE) rose slightly, though not for the construction sector. Trade balance data performed positively, and capital goods imports were up 14.4% over 12 months, which could be the first sign of investment recovery. The negative news came from bank credit, which failed to show any sign of recovery.
The labor market continued to improve in the May-July mobile quarter. But, as we stressed in our August report, we should not interpret this as a sign of economic recovery. Unemployment was down, from both June and the same period last year, and though employment growth also showed positive signs, the improvement is public sector-driven.
Twelve-month CPI rose from 1.7% in July to 1.9% in August, still slightly below the Central Bank’s 2%-4% target. While July inflation data seemed to signal that deflationary pressures might have hit bottom, this is less evident with August data.
The recent cabinet shuffle was blamed on a difference of opinion regarding the proper balance between economic growth and environmental protection. The straw that presumably broke the camel's back was the rejection of an iron ore mine, and related port, in the north. But this is a false dichotomy. The Bachelet government, even with the presence of the three ministers who recently resigned, has been expanding the role of renewable energy since taking office. In fact, this may be its most useful and significant legacy.
Several major investments in Chile have failed over an inability to win environmental approval. Merits of environmental regulations aside, there is no doubt that Chile needs to attract more investment. Improvements to simplify procedures and eliminate political influence should be undertaken.
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