Volatile Signals
Executive Summary
Incoming data, especially on economic activity and consumption, must be taken with a grain of salt. This is because of the two significant natural disasters that hit the country in the past two months. Their economic impact is not easy to assess.
On the consumption side, incoming data corroborates that, as expected, consumption continues to decelerate. The labor market is showing clearer signs of weakness even though the unemployment rate has stayed low.
In the last three months, imports of capital goods reached their lowest level since 2011. But if investment is a key problem underlying weak activity, the current credibility deficit is certainly not helping. Until now Chile has enjoyed the reputation of a well behaved country, where corruption was almost inexistent. Arguably this image is deteriorating.
In March the 12-month variation of the CPI came in slightly below market consensus. While the monthly change in the CPI was lower than expected, the details suggest that this surprise is not particularly deflationary. So inflation remains an issue, despite the weak economy.
The Inflation Report was relatively hawkish. But now the Central Bank is softening its language and moderating that perceived hawkishness. The board showed increased concern over the global scenario.
For months, the news in Chile has been dominated by campaign finance scandals and the allegations (so far unproven) that the President’s son used privileged information and access to arrange business deals for his wife.
President Bachelet named a commission and gave it a month to come up with a plan. The commission´s recommendations on transparency and campaign finance were bold. The President announced she would soon be sending a set of bills containing these changes to Congress, and called on legislators to approve them swiftly.
At the end of the televised speech, she surprised the local chattering classes by announcing that in September the government would begin a “constituent process” in order to draft a new constitution for Chile.No one knows for sure what this means. By introducing the constitutional issue Bachelet was aiming at damage control.
The private sector wasted little time in criticizing the “constituent process” as damaging to investment and growth. Even the IMF said the reform climate is not propitious for growth in Chile.
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