Transiting from depression to euphoria
The Central Bank’s June Monetary Policy Report was more hawkish than that of March. The Central Bank is preparing the market for the next cycle of monetary policy tightening, which should start before year-end. Perhaps the most relevant point was a downplay of the risk of a non-convergence rate towards the 3% inflation target. In general terms, the new base case scenario of the Central Bank seems quite reasonable. On the dovish side, the labor market continues to be the Central Bank’s main concern.
May’s Monthly Index of Economic Activity confirmed that the Chilean economy has been growing at an annualized trend of about 4.5% since mid-2017. In April, the 12-month variation of the index reached 5.9%, and 4.9% correcting for differences in working days.
Retail sales continued to accelerate in April. Consumers seem to be optimistic and are reluctant to de-leverage. Not only did retail sales point in that direction, but so did the value of consumer goods imports. The Manufacturing Production Index showed a surprising upturn. The 12-month variation came in at 11.8% compared to 8.5% expected by market analysts. Adjusting for working days, the variation falls to 4.7%, still the highest in more than five years.
The Monthly Index of Business Confidence (IMCE) brought mixed news in May. The overall indicator showed a slight increase compared to April. Expectations about the future course of the economy remained optimistic, although less so than in the previous month. Expectations about future investment remained quite optimistic but fell significantly in the industrial sector.
Labor market data published by the National Institute of Statistics for the February-April quarter were positive. For the first time in five months, the non-seasonal component of the unemployment rate showed a decline. Slower labor force growth could be signaling the end of the "encouragement" effect. Year-on-year employment growth fell for the third consecutive month but remained relatively dynamic. The quality of employment again showed a slight improvement. In April wages showed considerable deceleration, expanding only 3.0% in 12 months. A large part of the slowdown is attributable to the behavior of salaries for workers in the most qualified groups.
May monthly inflation was 0.3%, and annual inflation was 2.0%, at the bottom of the Central Bank’s 2-4% target range. Core inflation remained stable in May. It is worth noting that due to a lower basis of comparison, inflation is likely to jump to 2.5% or more in June and stay above 2.5% for the foreseeable future.
Chileans are becoming increasingly aware that the country is one of the world’s top lithium producers. The mineral is well placed to complement copper revenues as more and more products, from phones to electric cars, depend on lithium for their batteries. For this reason, the question of who owns, extracts, processes and exports lithium has become highly politicized. Two events in particular have attracted attention in recent weeks: the retaining of Julio Ponce Lerou as an external advisor to Sociedad Química y Minera (SQM), Chile’s largest lithium producer; and Tianqui Lithium’s recent purchase of Nutrien’s 24% stake in SQM, which could lead the combined companies to control as much as 70% of the global market. The recent political and legal tensions that have characterized relations between SQM and the Chilean government arise in part from SQM’s controversial role in Chilean politics. But more profoundly, they highlight the need to define the lithium industry’s place in Chile’s future development.
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