Chile’s economic activity remains weak; economy to expand between 1.25 pct and 2 pct in 2016

Chile’s economic performance is below its potential. Overall, the country’s economic activity continues to be weak. According to the latest data, Chile’s real GDP grew 1.7 percent in Q1. This shows a still active phase of slowing down. A severe contraction in gross fixed investment, especially impacting the mining sector, is mainly driving the weakness in economic activity. Consumer sentiment continues to highlight pessimism, which was worsened recently by diminished prospects of employment.

The Chilean central bank projects the economy might grow between 1.25 percent and 2 percent this year and then expand modestly to an average of 2.5 percent year-on-year next year. Moreover, the subdued recovery in the prices of metal commodities has also increased a negative sentiment about growth outlook for 2016, said Scotiabank in a research report.

Meanwhile, gradual improvement signs are seen in the country’s inflation. The combined impact of nominal exchange rate stability and fall domestic demand pressures has put the headline inflation rate on a slow normalization path in recent months. In May, consumer prices grew 4.2 percent year-on-year in 2017. In the mean time, authorities are unlikely to hesitate to adjust monetary policy under the current renewed volatility in the currency market.

“Our base case scenario assumes continuity of the monetary policy rate at 3.5 percent in the near term and modest adjustments next year in line with Fed-induced regional monetary developments,” according to Scotiabank.