Green Shoots Multiplying
Executive Summary
There are several signals now that the economy is on a recovery path. But we must be cautious. A month ago there was a single variable that gave us some hope: imports of capital goods. In December we were hopeful because this variable expanded significantly. But January’s figure came in relatively low.
In January we witnessed what could be the beginning of the recovery of business confidence. The latest Imacec (Monthly Index of Economic Activity) can be considered the best economic news in a while. According to the Central Bank, the rebound was led by the mining sector, as well as by services and commerce. Public investment is also helping growth.
Two factors favored retail sales in December: Retailers reduced inventories, and consumers bought more cars in advance of the increase in the ad-valorem tax. But these two factors may prove to be transitory. Exports of agricultural products increased considerably; it well may be the case that this is a response to the devaluation of the peso.
In January inflation gave analysts a big surprise. With this surprise, inflation will stay outside the Central Bank`s 2% - 4% target range for a longer period of time. The surprises were fairly widespread but the biggest concentrated on items presumably related to tax changes and the exchange rate. The combination of higher-than-expected inflation and stronger-than-expected economic activity caused the Central Bank to toughen its dovish language. The hawkish arguments came from different fronts. The communique gives the distinct impression that the probability of a rate cut in the first half of the year has decreased significantly.
A local magazine revealed that a company run by the President’s daughter in law had obtained a US $10m loan from Banco de Chile after a meeting between Dávalos and his wife and the bank's owner, Andrónico Luksic. The company planned to buy three plots of land in a suburban area that was to be rezoned. The loan was approved last March, one day after Michelle Bachelet took office.
Irritation over the loan is spurred by the contradictions between Bachelet’s policy proposals and her family’s business dealings. The government has emphasized equality and is supposed to be a government that is on the side of the “little guy”. The present government’s political narrative has been all about attending to the long-delayed needs of the bottom 99%.
Finally, a clumsy effort at damage control added to the trouble. After a week of increasing pressure, Dávalos stepped down. By insisting that this was a private business deal, the government is resorting to the kind of defense one might have expected from its predecessor, who constantly confused the private and public realms.
It remains to be seen whether this episode will have a cost in terms of public opinion. The President has surmounted much larger crises in the past.
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