Chile’s real GDP to grow 1.7 pct this year, median inflation likely to come in at 3.5 pct

Chile’s economy continues to be entangled in a fragile cycle with below-potential growth dynamics expected for the coming 18 months, noted Scotiabank in a research report. According to official analyses, potential growth rate is at 3.5 percent. This suggests a continuous slack in the economy.

“Real GDP is estimated to expand by 1.7 percent y/y this year before modestly accelerating to 2 percent y/y in 2017”, added Scotiabank.

However, sentiment metrics continue to bode a period of economic weakness due to a huge structural shock to the mining sector. Furthermore, the unemployment rate has been on an upward path in the past five months, affirming the bearish view. The global trade scenario, along with subdued copper price recovery dynamics is restricting the contribution to real GDP growth from the external sector, stated Scotiabank.

The process of inflation converging to target continues to be in place. Even if monetary authorities noted that deceleration of inflation has occurred at a slower than expected rate, financial market metrics and economy surveys indicate towards current convergence to the official target of 3 percent, plus or minus 1 percent in the next 12 months. The survey of Chile’s central bank underlines that median inflation is likely to reach 3.5 percent and 3 percent by the end of 2016 and 2017 respectively.

“In the context of a favourable inflationary environment and persistent economic softness, our most likely scenario for monetary policy contemplates the maintenance of the monetary policy rate at 3.5 percent over the next 18 months”, noted Scotiabank.