Life is not easy for any of us
Chilean economic activity as measured by the IMACEC grew in October, due to a temporary increase in mining and a recovery in commerce. But the 12-month variation of the IMACEC fell into negative territory. Retail sales also increased, due to a successful Cyber Day. But the outlook for consumption remains negative. Manufacturing production saw a significant decline in October, and the outlook for 2023 is not positive due to various factors, including high uncertainty and limited fiscal expansion. Business confidence decreased in November as well, and the forecast for 2023 GDP growth is negative. The current account deficit has increased, and unemployment rose in October, while inflation was 3.3% in November.
The monthly variation of the IMACEC, a measure of economic activity in Chile, increased from 0% in September to 0.5% in October, due to an atypical 6.4% m/m seasonally adjusted (MOMSA) variation in mining, and a recovery in commerce following a successful Cyber Day. However, the 12-month variation of the IMACEC dropped into negative territory in October, scoring -1.2% due to a stagnant economy with a high base of comparison.
Retail sales rebounded in October, with a 2% expansion in seasonally adjusted retail sales, although the y/y variation remained firmly in negative territory (-12.3%). Manufacturing production declined sharply in October, with the MOMSA variation falling from 1.5% in September to -3.4% in October. The outlook for next year is not positive, with business confidence continuing its downward trend and a median forecast for 2023 GDP growth in the Central Bank’s survey standing at -1.5%. Additionally, there are no clear signs of an improvement in the current account, due to a further deterioration in the terms of trade.
The Chilean economy added 26,000 jobs in the August-October rolling quarter, with the commerce sector adding 41,000 jobs. However, the manufacturing and information and communications sectors saw job destruction. The unemployment rate slightly deteriorated, remaining stable at 8% for the non-seasonally adjusted rate, but increasing from 7.9% to 8% for the seasonally adjusted rate. Average wages in October had a 12-month variation of 10.5%, 2.3% below CPI inflation, leading to a significant deceleration of the wage bill.
Inflation in Chile was higher than expected in November. There was a significant increase from October's historical low. Core measures also showed significant increases, suggesting that inflationary pressures have not yet dissipated. Nevertheless, the volatility and unpredictability of monthly CPI records, even of the volatility trimmed CPI, has become extreme in recent months. Monthly readings have been misleading. We have learned that inflation forecasts should be less sensitive to monthly readings, and that risk-taking in short-term inflation-linked instruments should be avoided.
Inflation projections in the latest Central Bank Economic Expectations survey were slightly adjusted downward, with the median forecast for December 2023 at 5%, and the forecast for December 2024 remaining at 3.3%. The Central Bank's base scenario for December 2023 increased from 3.3% in September to 3.6% in December.
According to the latest Monetary Policy Report, the baseline scenario for the monetary policy rate assumes a 50bp cut in April, resulting in a TPM of around 8% in December 2023. However, this is not consistent with the rest of the projections in the report, which predict that inflation will be within the target range, and that short and medium-term inflation expectations will be anchored around 3% by the end of 2023, while GDP will have been contracting for several quarters, and the output gap will be negative. The IPOM also projects a TPM of 4.75% by the end of 2024, which is above the Central Bank's estimated range for the neutral level.
The main variables that could lead to deviations from the baseline TPM scenario are inflation surprises, inflation expectations, and the speed of adjustment of macroeconomic disequilibria. Therefore, the probability of a TPM cut in January is almost zero.
It has been just over a year since Gabriel Boric was elected president and, as he himself would admit, it has been a year of learning. The presidency has moderated Boric, and he has repeatedly apologized for past mistakes and positions. But what will his new positions and policies be? How will he solve the difficult problems of crime, immigration, and the economy? Boric's challenge is that the solutions to these and other challenges often involve adopting policies he has opposed: promoting investment, strengthening law enforcement, toughening borders. Will he be willing to do those things -- and will his coalition go along?
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