Chile economy expected to grow below trend in the medium term

The monthly economic activity index puts Q3 growth at 2.1% yoy, vs the old projection of 2.4% and Q2 growth of 1.9%. Sequentially, the economy likely grew by 0.3% qoq on seasonally adjusted basis. Given the weak trade data in October (exports fell 17.9% yoy while imports fell 9.9% yoy) and virtually no significant momentum in other monthly indicators towards the end of Q3, the economy could fail to accelerate meaningfully in Q4, presenting some downside risk to the 2015 growth forecast of 2.3% (economy grew 1.9% in 2014). 

Looking ahead, the fact that the economy is still not managing to grow at trend despite the significant counter-cyclical fiscal spending shows that fiscal easing is failing to have a significant impact on private domestic demand and that the external demand weakness is too strong to be offset by the fiscal or monetary easing. 

"Given our assumption of a structural slowdown in China and its continued downward impact on commodity demand and prices, we do not see external demand conditions improving for Chilean exports any time soon. As a result, we continue to expect timid, below-trend growth for Chile over the medium term", says Societe Generale.