Chile’s economic growth likely to have rebounded in May

Chile’s economic growth is likely to have rebounded in May based on the trade figures. According to a Societe Generale’s research report, the country’s economic growth is expected to have accelerated 2.1 percent year-on-year in May from April’s growth of 0.7 percent. April’s print was the slowest growth pace in six months and a marked slowdown from March’s growth of 2.2 percent.

Chile’s central bank had mentioned that the deceleration was predominantly driven by drag from mining sector and below expected contribution from retail sectors and services. Economic growth is likely to remain below trend in the near future as the main long-term drivers such as exports and investment are not improving much.

Net exports are not contributing positively to the economic growth any more due to the sharper decline in exports. Moreover, given the uncertainty amongst Chile’s important trading partners, there is no significant improvement expected in the export outlook, according to Societe Generale. This is a huge drag on private domestic demand too.

Basically, counter-cyclical fiscal spending is driving growth. But, this is straining public finances even more against the backdrop of depressed commodity prices. Furthermore, it is doubtful how long public finances can underpin the economy. Therefore, both monetary and fiscal policy options are narrowing gradually. The economy, structural wise, is quite weaker currently than it was before 2013.

Chile’s growth potential has dropped to below 3 percent from over 4 percent, and considerable financial easing is not expected to be enough to restore the potential unless it is underpinned by positive external shocks.

“We recently cut our growth forecasts for 2016 and 2017 by 0.1pp and 0.3pp respectively assuming a weak commodity outlook ahead,” added Societe Generale.