The continued weakness in Chile's trade data (although partly due to further deterioration in terms of trade) shows that both the domestic economy and the external demand environment, have yet to show any sign of revival. As a result, and despite the fact that significant fiscal spending is underway, in Q2 the economy continued to grow significantly below its trend rate that has declined by nearly 25% over past couple of years. Therefore, the recent resilience of labour data and the unemployment rate with bit of scepticism and expect some near-term reversal in it, says Societe Generale.
The unemployment rate to have risen to 6.3% assuming the nearly unchanged pace of labour force and employment growth (in fact, there hasn't been much change in these indicators over the past year of growth weakness), according to Societe Generale. The Chilean unemployment rate subsided to 6.1% in March (and stayed unchanged in April), after peaking at 6.7% in August 2014. Most of the reduction came via the decline in labour force growth, while the trends in hiring haven't changed much over the past three quarters.
The developments in the labour market in the context of improving but still sub-trend growth have been quite remarkable. However, there have been lot of data limitations in this regard, and the relative stability of the labour market and the resilience of wage growth have failed to improve consumption meaningfully despite a modest uptick in Q1. A stronger labour market - a pre-condition for stronger consumption growth - will require a significant surge in investment activity. The labour market has been improving on the back of significant public spending, and there remain considerable limitations to this strategy in the medium term, suspects SocGen.
