Putting the worst behind us
Recent economic data support the idea that economic shrinkage bottomed out in May, and there are reasons to believe that the recovery will accelerate in coming months. But room for optimism remains limited.
In June, the 12-month variation of the Monthly Index of Economic Activity stayed negative, but improved. The June result was a pleasant surprise, surpassing not only the median Bloomberg forecast of -15% but even the most optimistic projection of -12.7%. Yet the contraction is extremely deep. Retail sales figures for June support the impression of a very gradual recovery.Ten of 12 sectoral categories showed a partial advance. While in June retail sales started to show a gradual recovery, manufacturing data remained mixed. The seasonally adjusted series showed a slight decrease, indicating that in June production continued to worsen.
Credit is still growing, but more slowly. In July, growth of the banking sector's credit stock showed troubling signs: the 12-month variation fell from 11.8% to 9.6%, dragged down by the collapse in consumer credit. We’ll continue monitoring these variables, since credit will be fundamental for economic recovery.
Labor market data for the rolling April-June quarter marked a new milestone, with unemployment hitting its highest rate since the financial crisis of the 1980s. More recent monthly data show some stability. Unemployment rose from 11.2% to 12.2%. Still, this figure underestimates the sharp deterioration of the labor market. The 12-month variation in employment continued to fall, reaching -20%. The impact of COVID-19 on wages is also strong.
Inflation continues to show a moderate downward trend, although uncertainty remains high because of the unusual mix of demand shocks, supply shocks and measurement problems. Judging by the generalized falls in the growth rate of various core measures of CPI, inflationary pressures are likely to diminish gradually.
The Central Bank is mulling over which policies should accompany recovery. The Bank signals that it will continue to use the tools already deployed to keep interest rates as low as possible for a long time. After reaching a peak on July 17th, medium- and long-term rates have fallen to exceptionally low levels. It’s only logical to expect at least a partial reversal of the interest rate fall, due to an increase in the term premium. Yet uncertainty remains high, both because of the course of the pandemic and because of actions in the opposite direction that the Central Bank may take.
Chile is entering an unprecedented electoral season, in which a series of elections will be held in the context of COVID-19. How these elections will be managed, how campaigning will occur, and how the pandemic will affect electoral preferences are all open questions. This is especially true for the constitutional debate which, if approved on October 25th, will unfold throughout 2021, coinciding with the presidential and congressional election campaigns.
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