It’s Getting Chilly

CHILE - Report 23 May 2014 by Igal Magendzo, Robert Funk and Alberto Etchegaray

Executive Summary

The perspectives for the economy in the short term are not catastrophic, but neither very encouraging. Investment has sharply decelerated, consumption growth is moderating, the labor market is deteriorating and inflation has increased. But record-low real interest rates, strong expansion of fiscal spending, improvement in the situation of the most advanced economies, and hopefully a dissipation of the uncertainty still surrounding the reforms will benefit the economy in the medium term.

Indicators show that the economy continues to decelerate beyond expectations. The monthly economic activity indicator (IMACEC) expanded only 2.8% in the 12 months to March 2014. Market analysts have systematically lowered their growth expectations for 2014.

Investment, the main reason for the economic downturn, continued misbehaving. This is related to the end of the investment boom in the mining sector. The good news is that machinery and equipment imports are stabilizing at the margin. But not only investment is to blame for the deceleration of the economy. All partial indicators show that private consumption continues to moderate.

In the January-March moving quarter, the unemployment rate was 6.5%, up from 6.1% in the moving quarter ending the previous month. Job creation is still dynamic but decelerating.

Inflation is on the rise. The 0.6% monthly increase in CPI in April 2014 unexpected. The 12-month accumulated variation of the CPI in April was 4.3%, surpassing the 2-to-4 percent band the Central Bank targets. In the coming months, it is highly likely that the 12-month variation of the CPI will be above 5%.​

As widely expected, at its May Monetary Policy Meeting, the Central Bank kept its guiding interest rate unchanged at 4.0%, for the second month in a row. If the economy does not shows signs of recovery, we might observe another two cuts of 25bps before year-end.

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