While GDP growth picked up in Q3, activity data for September indicates that the economy had already slowed significantly prior to the protests beginning. GDP is likely to contract in Q4. That said, events of recent days have raised hopes of the protests ending soon, and we continue to expect growth to recover to 2.5% next year.
- While GDP growth picked up in Q3, activity data for September indicates that the economy had already slowed significantly prior to the protests beginning. GDP is likely to contract in Q4. That said, events of recent days have raised hopes of the protests ending soon, and we continue to expect growth to recover to 2.5% next year.
- GDP data released today show that the economy picked up from 1.9% y/y in Q2 to 3.3% y/y in Q3. And in seasonally adjusted terms, growth once again picked up by 0.7% compared to the previous quarter.
- Both mining and manufacturing recovered in July and August. The strength of activity in these months offset a very weak September, in which activity contracted by 0.6% m/m. This was due largely to a contraction in mining production.
- Overall, while growth for Q3 was strong, the weak September means that activity had already faltered prior to the beginning of protests. Disruptions caused by the protests mean that we expect that economic activity contracted by 0.5% in October. This is consistent with growth of around 1% y/y (down from 3% y/y in September. November is likely to be flat in m/m terms.
- The main hits are likely to be to retail sales. While exports were affected by the protests, data released by the central bank suggests that the strikes at ports ended up having only a modest effect on exports and imports. And importantly, despite nationwide strikes, reports from Chile’s largest mines indicate that mining activity probably held up well in both October and November. It is difficult to make forecasts in this environment, but we expect a q/q contraction of 0.5% in Q4, which would be consistent with growth of around 1.0% y/y for Q4. This would take growth for 2019 as a whole to 2.0%.
- The Chilean peso has recovered by around 5% against the dollar since Friday, when lawmakers announced their acceptance of protestors’ demand that a constituent assembly play a role in writing a new constitution. The extent of this newly elected assembly’s role in writing the document will be decided next April in a referendum. If the protests do ease, we expect the peso will strengthen even further in the coming weeks.
- Equities have also surged since the announcement, and while bond yields have risen, they remain low by past standards. Overall, while financial conditions tightened briefly, they have already recovered. (See Chart 2). And so long as protests do ease from here, we expect them to remain loose.
- We expect that growth will recover next year. While the weakening of the peso will push up inflation, the rise should be modest and inflation expectations remain anchored. The central bank is more concerned with supporting growth and we expect 50bp of further cuts in the current cycle. (See our recent Update for more). Loose monetary policy should help consumer spending to recover next year.
- Furthermore, we expect domestic demand to recover with the help of loose fiscal policy and a rise in copper prices next year. The government has already loosened fiscal policy by 0.4% of GDP, and Chile’s strong government balance sheet affords the government room to increase spending further. All told, we expect growth to recover from 2.0% in 2019 to 2.5% in 2020.
Chart 1: Chile GDP
Chart 2: CE Financial Conditions Indicator
Source: Bloomberg, CE
Quinn Markwith, Emerging Markets Economist, +44 20 7808 4072, email@example.com