It's Been a Cold, Cold Winter
Executive Summary
Pessimism in Chile is rising, with economists and business leaders increasingly blaming the government for the economic slowdown. Most analysts have lowered their growth estimates, as have the Central Bank and the Ministry of Finance.
We, however, are far from agreeing with the apocalyptic scenarios that some analysts are proselytizing, and the debacle that many businessmen are heralding. In fact, we’re expecting gradual recovery to slowly begin in coming quarters.
The collapse of investment is the main driver of slowdown, but consumption is providing the negative factor now.Retailers are being squeezed not only by lower sales, but also by strong recent currency depreciation.
In his speech to the Senate, Central Bank President Rodrigo Vergara urged listeners to regain confidence in the strengths of the Chilean economy. Down the road, this might encourage new investment. But in July, the investment landscape still looked rather ugly.
Deflationary forces have yet to appear. But there is little reason to worry about this. Inflation will almost certainly be closer to the Central Bank’s 3% target by mid-2015.In its September meeting, the Central Bank board decided to ease the reference interest rate once again, to 3.25% from 3.5%. This is the third 25 bp cut in a row; it appears the easing cycle is winding down.
Since the return to democracy, the role of the finance minister has been central in Chilean politics. But this arrangement began to erode during the previous government.In President Michelle Bachelet’s second administration, the trend toward low-key finance ministers has continued.
The government has implicitly accepted the criticism issued by the student movement on what the students consider to be previous administration’ excessive emphasis on economic growth. And Finance Minister Alberto Arenas appears to have allowed other ministers to take a leadership role.
The government liaison with business leaders has not been Arenas, but Interior Minister Rodrigo Peñailillo. He unquestionably has political talents, but is also benefitting from Arenas’ early mistakes.
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