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Country Economic Forecast | Chile Page 2 Forecast overview A broad-based recovery at full steam The Q4 2017 national accounts showed a broad-based acceleration well underway in the Chilean economy. GDP expanded 0.6% q/q, yielding an annual growth rate of 3.3%. However, statistical revisions to earlier data (a much weaker H1 outweighing a stronger Q3) meant that overall growth in 2017 was 1.6%, below the 1.7% we had projected based on activity data. Given the current robust momentum and helpful base effects, we have revised our 2018 GDP growth forecast up to a heady 3.8% – the fastest pace of any of the major economies in Latin America. We expect a strengthening labour market and rising sentiment to generate a robust, consumption-driven expansion, with 2019 GDP growth also raised slightly to 3.0%. Within the components of GDP, consumption has provided a reliable positive impulse, while investment has finally shown signs of a sustained recovery. We expect this to continue in 2018, with consumption growing 3.0% but investment speeding up to 4.3%. Meanwhile, we expect import growth to outstrip exports, meaning net trade will drag on growth. High-frequency data seem to support this picture. Industrial production grew 4.8% y/y in the quarter to February, buoyed by the rebound in mining (8.3% y/y) and solid manufacturing (2.5% y/y). On the retail front, sales grew a healthy 4.1% y/y in the quarter to February, albeit this was the lowest figure for 8 months. This hints at slightly slower consumption on a quarterly basis in early 2018, which could be driven by rising participation dampening average wages. Employment has gained momentum in recent months, growing 2.7% y/y by February, but real earnings growth has decelerated to 1.6% y/y. Workers inactive during Chile’s ext ended downturn may be re-entering the workforce, but as this effect unwinds, the labour market should begin to tighten again later in the year. Meanwhile, a surge in the supply of labour may have interacted with a strong peso to depress inflation in recent months. Headline inflation dipped below the 3% ± 1% target band to 1.8% in March, while the core rate stayed at 1.6% (its lowest level since 2013). However, a weakening currency and less rapid growth in the labour supply should allow headline inflation to edge higher, nearing the 3% target by late Q3 2018. Despite the currently subdued inflation environment, we do not expect the central bank to cut the policy rate, as demand pressures are set to build. Indeed, we forecast a first hike in interest rates in late Q4 2018. 1 2 3 4 5 6 7 8 -5 -4 -3 -2 -1 0 1 2 3 4 5 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Consumer spending Investment Govt. consumption Net exports Inventories GDP growth Chile: Contributions to GDP growth % y/y Source : Oxford Economics/Haver Analytics -20 -15 -10 -5 0 5 10 15 20 25 30 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 % year Investment Consumption Source: Oxford Economics F'cast Chile: Consumption and investment -2 0 2 4 6 8 10 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 % year Consumer prices Source: Oxford Economics F'cast