The second wave
February’s IMACEC was positive. The 12-month variation of the seasonally-adjusted non-mining IMACEC increased from -0.1% in January to 0.7%, which implies a return to pre-pandemic levels. In both March and April, economic activity likely fell, due to the return of quarantines. The hope is that the immunization process will allow for a recovery in the second half of the year.
In its March Monetary Policy Report (IPOM) the Central Bank increased its 2021 GDP growth forecast range to 6%-7%. The arguments cited were: (i) a higher starting point; (ii) reduced effect of quarantines; (iii) excess liquidity consumers’ hands; (iv) a fast vaccination process; (v) favorable external conditions; and (vi) expected rebound in public investment. Perhaps the greatest concern raised in the IPOM was weak investment, affected among other things by the increase in the financial burden on companies. We adjusted our central growth scenario downward, to 7.5% from 8%.
Seasonally- and calendar-adjusted retail sales accelerated, from 5.3% to 7.4%. The monthly variation of the seasonally-adjusted series returned to positive territory. The retail sales outlook for March and April is not particularly encouraging, but a third pension savings withdrawal, together with additional government transfers, could strongly boost retail sales. During February manufacturing advanced moderately, although some indicators remain in negative territory.
The value of imports reached an all-time record high in March. Imports of consumer goods stood out, scoring 40% higher than the average monthly figure for 2019. This should be reflected in lower pressure on the prices of goods whose inventories had run down. Imports of capital goods showed a significant increase as well; however, in this case, we need more information before being able to speak of a sustained recovery. The value of exports remained within the $7,000 - $7,500 million range, where it has oscillated since December 2020. However, mining exports were at their highest level since the end of 2012.
The deceleration in labor market recovery has been confirmed. In the December-February rolling quarter, there was a slight change. But the employment gap continued to close, compared to its pre-crisis levels. There are still about 800,000 fewer people employed as a result of the pandemic. Aggregate wages rose slightly in February, extending the moderate recovery of previous months.
CPI again surprised on the downside in March, although by less than in February. This time the surprise in the “food and non-alcoholic beverages” sector was generalized. This could mark the beginning of a normalization of these prices. In addition, there are no signs of underlying inflationary pressures. We consider that the effect on prices of a third withdrawal from pension savings would be rather limited.
In the minutes of the last Monetary Policy meeting the Central Bank started to prepare the market for a gradual normalization of monetary policy. It announced the likely sequence: first the ending of the extraordinary measures, and then increasing the TPM. In the March IPOM, the Central Bank widened the corridor for the base scenario for the TPM, including a potential first hike by year-end. Nevertheless, both the IPOM and the minutes emphasized that this is very unlikely to happen. In recent months, long-term interest rates have trended up. Several factors stand behind this trend.
The Piñera government is dealing with a brutal second wave of COVID, badly implemented assistance, and irresponsible politicians. As a result, it has been unable to stem continuing pressures to use the private pension system as a piggy bank for financing aid, or to propose a satisfactory alternative. Meanwhile, other populist measures have gained traction in Congress, such as a tax on the super-rich. The result is growing conflict between Congress and an increasingly unpopular president.
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