Valdes Calls Bottom of Chile's Slowdown as Retail Sales Soar

  • Finance minister says January was low point in current cycle
  • Economy is entering its third straight year of sluggish growth

Chile’s economic slowdown has passed its worst, though two years of declining investment have taken their toll and the rebound in growth will be gradual and limited, said Finance Minister Rodrigo Valdes.

Growth should start to pick up after the Imacec index, a proxy for gross domestic product, expanded at the second-slowest pace in six years in January, Valdes said in an interview at his office in Santiago on Tuesday. A day later, the statistics agency reported the biggest increase in retail sales in more than two years in February.

“The Imacec of 0.5 percent in January should be the low point of this cycle,” Valdes said. “We are not growing much, but there is no crisis.”

It is not the first time the government has called the bottom of the slowdown, with January’s downturn coming almost a year after it first talked of the “green shoots” of recovery. The economy is now entering its third year of growth close to 2 percent, its worst performance over any similar period of time since the economic collapse of 1982. Slumping copper prices have slashed investment in an industry that accounts for more than half of exports and other industries are struggling to take up the slack.

Deputy Finance Minister Alejandro Micco first forecast that the downturn was coming to an end as growth accelerated to 2.7 percent in the first quarter of last year from 1.6 percent in the previous three months and 0.9 percent in the third quarter of 2014. That recovery then petered out.

February Rebound

“Throughout 2015, economic data went from bad to worse just like the external
scenario, but now that it has stabilized, it’s enough for the Chilean economy
to start recovering a bit,” said Cesar Guzman, an economist at Banco Security in Santiago.

February’s economic figures indicated renewed strength in domestic demand. Retail sales leaped 7.4 percent from the year earlier, the national statistics agency reported today, compared with the 3.9 percent median estimate of 13 economists surveyed by Bloomberg. Manufacturing gained 1.3 percent over the same period, the biggest increase since September.

Valdes’ optimism on growth comes even as economic headwinds increase. The government scaled back spending plans last month and the central bank has started to raise interest rates, damping expectations for a recovery.

The bank reduced its 2016 growth forecast to between 1.25 percent and 2.25 percent from 2 percent to 3 percent Monday, citing depressed business and consumer sentiment and falling commodity prices. Growth will accelerate to 2 percent to 3 percent next year, policy makers said.

The Finance Ministry forecasts 2 percent growth this year, with the bias on the downside, Valdes said.

Potential Growth

Neither can the economy grow as fast as it used to without generating inflation. The government’s estimate for “potential growth” of 3.6 percent may need to be reduced, Valdes said.

“Offering potential growth rates like the ones seen in Chile through 1985-1997 would be populist,” said Valdes, referring to a period when the economy grew an average 7.1 percent without fueling inflation. Still, “I wouldn’t like to take the perspective that potential growth has been punished too much, because investment rates are still fairly respectable.”

Investment fell 1.5 percent last year and 4.2 percent the year before, with the central bank forecasting an increase of only 0.5 percent for 2016. The bank estimates the economy can now grow only 2.9 percent to 3.2 percent without generating inflation.

With the decline in copper prices likely to last various years, the government can’t spend its way out of downturn, Valdes said. The government reduced its 2016 spending plans by $540 million earlier this year after a committee of experts slashed its forecast for the long-term copper price.

Chile targets a balanced budget, once cyclical affects such as high copper prices are taken out of the equation. The so-called structural deficit is expected to reach 1.3 percent of GDP this year and then narrow by 0.25 percentage points a year.

“That continues to be our principal guide,” Valdes said. The recent spending plans “strengthen our commitment” to that goal.

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