Chile's economic growth improves in September, but considerable downside risk to 2015 forecast

Chile's economy is expected to recover mildly from the sharp deceleration in August (1.8% yoy versus 1.1%). However, the sharp slowdown in August was probably good enough to keep Q3 growth at 1.8% yoy vs 1.9% in Q2. Accordingly, the 2015 growth forecast at 2.3% does not hold anymore and the economy appears to be on course to grow a couple of percentage points lower than the estimate (but a couple higher than the 2014 number). The main cause of the weak growth projection is persistently lacklustre private investment, as exports have failed to pick up. Also, the substantial rise in public spending and the stronger labour market have failed to lift consumption growth. 

"We still think that the economy has bottomed. However, there is limited upside from the current pace of growth as the key long-term growth drivers - investment and exports - continue to show little improvement", says Societe Generale.

The positive contribution to growth from net exports stems from a significant decline in imports, another factor explaining the weakness in domestic demand growth. In sum, growth is primarily surviving on counter-cyclical fiscal spending and - arithmetically - falling imports. Structurally, the economy is much weaker now than it was a couple of years ago. Growth potential has declined to less than 3.0% from more than 4.0%, and substantial fiscal and monetary easing is unlikely to be sufficient to restore the potential unless supported by positive external shocks. With the China factor continuing to play a big role on the external front, there is little room for optimism in the medium term.