Private consumption, infrastructure investment spending to drive Chile’s economic growth in 2016/2017

Chile’s economy continues to face strong obstacles to attain an accelerating growth path. However, the country might rebound gradually in H2 2016. In the year to March, Chile’s economy expanded 2.3% y/y, according to the economic activity metrics. Chile is likely to carry on with recalibrating fiscal and monetary policies and rebalancing its economic structures to adjust to the blow received in the terms of trade from a steady drop in copper prices, weak demand from China and anticipated tightening of global financial conditions.

Chile’s consumer and business sentiment metrics continue to suggest a negative outlook. This is hinted by the surge in the country’s jobless rate to 6.3% in March. According to Scotiabank’s research note, infrastructure investment spending and private consumption are likely to primarily drive the economic growth in 2016-2017.

“Real GDP growth will be under 2% in 2016/17, below the near 3.5% potential growth rate”, added Scotiabank.

Meanwhile, indexation practice and pass-through impacts from the currency’s depreciation continue to mainly drive potential price pressures and deviate from the central bank’s inflation target range of 3%, plus or minus 1%. Chile’s inflation continues to be close to the 4% y/y territory through H1 2016.

Chile’s inflation is expected to reach the target rate in H1 2017. The convergence to the target continues to be a main priority for the central bank. Chile’s central bank may mull over tightening monetary policy gradually in line with the foreign market conditions and inflation developments.

“The upward adjustment of the central bank rate, currently set at 3.5%, might range between 50 and 75 basis points over the next 18 months”, said Scotiabank.

Meanwhile, Chile’s current account deficit is expected to reach 2.7% of the GDP in 2016 after registering 2% in 2015. Also, total public sector borrowing requirements might reach 3% of GDP in 2016.