Sailing into the unknown

CHILE - Report 25 May 2023 by Igal Magendzo and Robert Funk

The Monthly Index of Economic Activity (IMACEC) for March confirms the ongoing decline in consumption, and stagnation in economic activity. National accounts figures for Q1 2023 highlight the weakness of consumption in a context of high inflation, elevated interest rates and weak consumer confidence. In March, retail sales continued to decline (seasonally adjusted), although the 12-month variation increased, albeit with predominantly negative figures. Services remained one of the most dynamic components. National accounts also indicated a continued decrease in investment. Since H2 2022, the Monthly Index of Business Confidence indicates pessimism in the business sector, and aligning with weak investment conditions. National accounts provided a more positive outlook for exports compared to domestic demand. The correction of the current account deficit continued in Q1 2023. The bad news is that the value of monthly exports of goods dropped in April.

There were ongoing signs of weakness in the labor market during the January-March quarter. Employment continued to decline, particularly in the private sector, with most sectors experiencing job losses. In terms of sectors, it is worth noting that the 12-month variation for most activities turned negative for the first time since the August-October 2022 rolling quarter. Wages in 12-month variation increased in real terms, entering positive territory (albeit slightly) for the first time since September.

CPI decelerated line with expectations in April, signaling a moderation inflation. Overall indexation followed historical patterns, and the price of services, especially personal services, slowed notably. In April, the 12-month variation in the CPI fell below 10% for the first time since March 2022. However, the non-volatile CPI (IPC-SV) surprised us slightly on the upside. The prices of services, which drove price increases in Q1, moderated April. The prices of goods, in turn, remained relatively stable during the month, with a fall in the 12-month variation.

In May’s Monetary Policy Meeting, the Central Bank kept the Monetary Policy Rate (TPM) at 11.25%, in line with expectations. However, the communiqué merely reiterated the key points from the previous Monetary Policy Report (IPOM). In truth the Board is looking for a slowdown in inflation, particularly in core inflation (IPC-SV), before acting. In our central scenario, the cutting cycle is expected to begin in July, although there is a bias toward delay, due to the cautious approach demonstrated by the Central Bank, and its reluctance to communicate a specific bias.

The Committee of Experts working on Chile’s new Constitution has crafted a de facto first draft, to be voted upon in plenary sessions this week. The proposals don’t seem to vary much from the current Constitution, aside from eliminating the controversial concept of a subsidiary state and replacing it with a more social-democratic model, and a few changes designed to avoid party fragmentation. This relative conservatism is the result of the political compromises required to reach agreement, but may be insufficient to satisfy both poles of the political spectrum. Yet it is those extremes that have been guiding much of Chilean politics for the last few years.

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