Chilean economy enters adjustment mode and Central Bank forecasts weak growth for 2022-2023

RIO DE JANEIRO, BRAZIL – A note of high moderation was injected yesterday by the Monetary Policy Report (IPoM) presented by the Central Bank to the Senate, which showed that in two years, Chile will go from an economy that would grow around 12% in 2021, to one that could register a null expansion in 2023.

First, as expected, the institution raised the outlook for this year’s Gross Domestic Product (GDP) expansion from the 10.5%-11.5% range in September to 11.5%/12.5%.

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At the same time, it estimated a more significant advance in domestic demand, which will amount to 21.6%, driven by the dynamism of activity and spending. In each case, there were substantial revisions in consumption and investment, with annual increases of 17.6% and 19.2%.

But the adjustment over the next two years will be felt: “Between 2022 and 2023, the annual expansion rates of the economy will have a significant reduction”, warned the president of the entity, Mario Marcel, before the Senate Finance Committee.

Next year, GDP will grow between 1.5% and 2.5% (in line with what was forecast in the September IPoM), but in 2023 the revision was downward. Now, it is expected that there will be either no variation or, in the best scenario, a meager 1%.

The reason? Partly because of the “considerably more demanding” bases. He also stressed that this is “consistent with the expected change in macroeconomic momentum and the closing of the activity gap”.

Of course, Marcel mentioned that “negative quarterly expansion rates are possible on this trajectory”.

FROM OVERHEATING TO RECESSION

Thus, with an actual probability of a contraction of the economy in more than one quarter, Marcel explained how to interpret this path during the press conference to present the IPoM.

The Central Bank’s scenario considers that private consumption will fall 0.2% in 2022 and 1.5% in 2023, years in which money transfers from the Treasury to households will not be replicated in the magnitudes of 2021, in combination with an interest rate that will increase to discourage spending.

Given this, the picture emerges that the economy is emerging from an unprecedented gap between GDP growth and its potential level.

Marcel estimated that in the last quarter of the year, the difference would be 5%, which “in the entire history of the Central Bank’s measures” has never happened before.

Regarding the decrease in private consumption, he said that it is mainly explained by reducing the consumption of durable goods, which grew the most this year. It was, he said, 60% above pre-pandemic levels.

This, he clarified, is a “less painful” adjustment than if it occurred in other components of consumption. He assumes that this deceleration will go hand in hand with lower inflationary pressures, as shown by the Consumer Price Index (CPI) projections as of December for the next two years.

These decrease from the 6.9% annual rate registered this year to 3.7% in 2022 to converge to the Central Bank’s target of 3% in 2023.

All this is accompanied by adjustments in the Monetary Policy Rate that has a foreseen margin -according to the corridor presented in the IPoM- to reach up to 6.5%.

“I believe that these elements are important to understand and interpret what a negative variation rate means in a quarter or to have this scenario of a technical recession”, he emphasized.

But this does not exempt a more pessimistic scenario, he warned.

INVESTMENT

If the falls in productive activity were due to “a deepening of the imbalances that have been affecting us, such as the increases in long-term interest rates”, associated with higher levels of uncertainty -such as the noise caused by the initiatives of new partial withdrawals from the pension funds-, the weighting of this decrease “would, of course, be a more worrying situation”.

In this context, for investment, the central IPoM scenario indicates that it will decrease 2.2% in 2022 and then increase marginally in 2023 (0.1%).

“In these projections, public investment and the drag from large projects will not be enough to offset the impact of local uncertainty and high long-term interest rates on other components of private investment,” said Marcel.

To this, he added the peso depreciation, the stock market’s poor performance, and the limited prospects of expansion of the local economy for the next biennium.