The unexpected growth of the Chilean economy moves market forecasts

Chile shows that the economic slowdown could be less aggressive in the coming months.

The monthly economic activity indicator (Imacec) expanded by 0.4% in January, leaving behind projections of a contraction for the first month of 2023.

The data gave optimism to the market, reversing yesterday’s weakening of the Chilean peso in previous days.

And although Mario Marcel, Minister of Finance, asked for caution before the figure because there could still be falls during this quarter, especially in February, due to the effects of the forest fires, some analysts began to revise their estimates, at least of the gross domestic product (GDP).

Scotiabank’s economic team, led by Jorge Selaive, indicated in a report that, with this record, they revised their GDP contraction projection for 2023 to -0.8%.

Along the same lines, Coopeuch’s Research Department corrected its GDP estimate from -1% to 0% for the end of the year.

However, they warned that if the dynamics of the last records are maintained, “2023 will surprise us with a growth” of the economy is not out of the question.

WILL IT AFFECT MONETARY POLICY?

Coopeuch was surprised by the growth capacity of the activity in January, especially “in a context of very deteriorated fundamentals and with a Monetary Policy Rate (TPM) at historical levels (11.25%), which will certainly pressure the Central Bank to maintain the restrictiveness of the monetary policy for longer than expected”.

In the latest market surveys, the median of analysts expected the Central Bank of Chile to start cutting its interest rate at the May 2023 meeting, although, as Coopeuch points out, doubts now arise.

For his part, Marco Correa, chief economist at BICE Inversiones, indicated that this scenario of a “more resilient” economy poses a greater difficulty for the monetary policy decisions of the issuing institution.

“We estimate that the BCCh authorities will maintain its reference rate at 11.25% until June of this year,” said Correa.

And he added: “If this greater resilience of activity continues, with positive inflationary surprises, it could require more restrictive monetary conditions for a longer period”.

WHAT CAN HAPPEN WITH INFLATION?

Following the release of the January Imacec, Bloomberg Línea consulted Guillermo Araya, research manager at Renta 4, who said that the first impression, with a short-term view, is that the Central Bank will postpone lowering rates.

However, he clarified that, as a second derivative, “as there is a greater production of goods and services, there is a normalization of supply and, therefore, as there is greater supply, it is more likely that prices will fall. In other words, by maintaining demand conditions but increasing the supply of goods and services, the price of these should tend to fall”.

Secondly, Araya recalled that the rise in prices at a global level has resulted from high liquidity, added to a contraction in supply due to the confinements to contain the pandemic.

“Therefore, a normalization in supply is very healthy for the economy, as long as there are no liquidity shocks such as a new withdrawal of pension funds”, he summarized.

In contrast to this view, Correa highlighted the possibility that a greater resilience of the economy can keep inflation at high levels for longer.

In line with the latter position, Andres Perez, chief economist at Itaú, argued that the economy is slowing down. Still, the process has been much more gradual than anticipated, so “inflation pressures on the demand side should be more intense and persistent, and low TPM could take even longer than internalized by market prices (May)”.

Likewise, the Itaú executive stated that, for the time being, his team expects the economy to have a contraction of 0.9% this year (with a bias to an even lower contraction), inflation at the end of the year at 4.1% (with an upward bias) and low TPM starting in June”.

WHY DID CHILE’S ECONOMIC ACTIVITY IMPROVE?

Scotiabank highlighted five aspects of why the Chilean economy is rebounding:

• A better start to the year with a positive carryover effect
• Better than expected labor market resilience
• Improvement in terms of trade explained by a significant increase in the price of copper
• Rapid execution of public spending since the end of 2022 that would have continued into early 2023
• A political scenario that would moderate the structural reforms under negotiation and a constitutional process (constitutional council) where we anticipate a political balance of forces similar to that observed in the current Senate.

With information from Bloomberg