Chile’s economy likely to grow below-trend in medium term on weak external demand

Given Chile’s weak trade figures for Q4, where exports dropped 18.25% y/y and imports declined 11% y/y, and no considerable growth in other monthly indicators, the country’s economy is likely to have expanded sluggishly in Q4 2015, growing 1.6% y/y, the slowest in five quarters. On a seasonally adjusted quarter-on-quarter basis, the economy is expected to have expanded 0.4%. For the entire 2105, Chile’s economy likely grew 2%. Furthermore, t he economy activity in January already implies a further slowdown in Q1 2016 indicating growth might decelerate further this year.

Looking into details, weakness in domestic demand is expected to have remained in Q4, in spite of a strong counter-cyclical fiscal spending. However, there are also signs of fiscal space deteriorating modestly because of a muted growth environment. Meanwhile, investment continues to be significantly weak. It is difficult to anticipate a decent investment momentum for as long as exports remain weak.

The fiscal expansion pr the accommodative monetary stance is unable to counter the weakness in external demand. With the assumptions of a structural slowdown in China and its continued negative impact on commodity prices and demand, external demand condition are not likely to improve for Chilean exports any time soon. Hence, timid, below-trend growth is expected for the country in the medium term.