Chile’s economy likely bounced back in February but near term outlook remains weak

Chile’s economy expanded just 0.5% y/y in January, smallest growth in 17 months. The slowdown was mainly due to contractions in manufacturing and mining that were partially countered by growth in service activities.

“For the month of February, given the trade figures, we expect growth to have bounced back again to 1.5% yoy”, says Societe Generale.

But the expected figure does not suggest that Chile’s outlook in the near term has recovered. It continues to be in line with growth projections for Q1 2016 of 0.9% y/y, added Societe Generale. Recently, BCCh lowered it s 2016 growth forecast by 0.75%.

There is limited upside to the current growth pace as important drivers of long-term growth such as exports and investment continue to show very little improvement. Net exports, on the external front, are not positively contributing to growth anymore due to sharp decline in exports. With increasing uncertainty amongst key trading partners, Chile’s exports outlook is unlikely to rebound, noted Societe Generale. This is negatively impacting private domestic demand.

Counter-cyclical fiscal spending is mainly driving growth. But this is greatly hurting public finances. Also, it is doubtful how long it can help the economy. Therefore policy options are narrowing slowly. On structural basis, economy is much weaker than it was prior to 2013. Growth potential has fallen to below 3% from over 4%, while substantial fiscal easing is not expected to be enough to bring back the potential unless it is helped by positive external shocks.