Volatility and slowdown, as Piñera’s honeymoon ends
Economic activity varied greatly from half to half in 2018, with H1 growth running at 5%, and signs of recovery in machinery and investment. But H2 saw deceleration, with activity and consumption growth slowing in Q3.Today the economy seems to be growing at 3%, and we expect 2018 GDP growth to come in at close to 4%.
As in previous months, retail sales in November were highly volatile. Our reading of November’s figure is not particularly negative, though data corroborates that consumption slowed in H2. Data from the National Institute of Statistics on manufacturing production has grown volatile, too. The Monthly Index of Business Confidence dipped December, but we should not jump to negative conclusions, though the figure confirms the H2 deterioration in confidence.
Trade in December was in line with recent dynamics: the value of exports fell in y/y terms again, the value of imports of capital goods remained high, and consumer goods performance was less favorable. Cherries deserve a special mention: exports practically doubled between 2017 and 2018, to a record $1.08 billion in 2018. Chinese demand for cherries is especially high, as they are greatly valued as a lucky gift: their red color symbolizes prosperity and fortune.
Last year was bad for the National Institute of Statistics, with its labor market data strongly criticized, even by the Central Bank. The INE says it will update its methodology, but to that issue we can now the unusual recent data volatility. The figures are not encouraging, and could corroborate the weakness of the labor market in H2 2018.
Inflation in 2018, for the third year in a row, finished below the Central Bank’s 3% target, and is highly likely to stay below 3% in 2019. The introduction in January of a new consumer basket with a new base year (2018 = 100), and methodological changes, translates into greater uncertainty going forward.
The Central Bank in early December kept its monetary policy rate at 2.5%, after raising it in October. The Board has probably grown more dovish since then. We believe that, given recent events in global markets, the majority of the Board is not so convinced of the "forward guidance" expressed earlier. This means the local curves will remain very reactive to international news.
President Sebastián Piñera’s honeymoon may be over. His government in 2019 will encounter increasing pressure to implement stimulative reforms, as it faces a more complex external situation. Yet the government knows its legislative success depends on a Congress controlled by a divided opposition, and major bills could be delayed for months.
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