Nascent Recovery Could Be Tempered by Political Outcomes
Though Q2 figures clearly confirmed the sluggishness of the Chilean economy in H1, Q3 numbers offered some green shoots, especially in exports and machinery, and in equipment investment. GDP growth recovered, to 2.2% y/y in Q3, from 1% y/y in Q2, with production strongly favoring the volatile natural resources-linked sectors. If we exclude mining, utilities and fisheries, though, the growth rate would have been stable to falling, to 1.4% from 1.5%.
Investment in machinery and equipment grew 6.4% in annual terms, its fastest since Q3 2016, while investment in construction and public works has remained sluggish. It is highly likely that next year we’ll see a cyclical recovery of this type of investment, especially in housing. But we need to be cautious, because the choice of the next president, to be decided in the December 17th runoff, might affect medium-term risk perceptions.
Exports also delivered positive news, powerfully rebounding across the board in Q3 2017, and reaching their highest real-term value since Q2 2014. Mining, agricultural and industrial export growth y/y was positive, and q/q seasonally adjusted growth rates were all above 20%. Household consumption growth remained relatively stable, as did the current account deficit as a percentage of GDP, at 2% on average in the four quarters to Q3. FDI remained weak.
Just as September’s CPI delivered a big surprise, coming in 0.4% below market expectations, October’s CPI surprised markets again, in a similar magnitude but in the opposite direction. Monthly CPI came in at 0.6%, against expectations of 0.2%. The 12-month variation reached 1.9%, up from 1.5% in September, closer to the bottom of the Central Bank’s 2%-4% target. CPI volatility and unpredictability continues to rise, yet inflationary pressures appear to have stabilized. Inflation will likely hover around 2% for a few months, and stay below 3% for the next two years.
As was widely expected, the Central Bank kept the Monetary Policy Rate (TPM) at 2.5% at its November meeting. Far from abandoning last month’s dovish tone, the communiqué was, surprisingly, practically unchanged. This is somewhat erratic. In short, we believe that the Central Bank is telling us that if there are two successive deflationary surprises, it will cut the TPM. Still, the next cut could come in January, if November and December inflation surprise on the downside, pushing inflation below 1.5%.
Labor market data for the July-September rolling quarter was rather negative. Unemployment surprised on the upside, at 6.7%, vs. expectations of 6.5%.
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