Fynsa
The economy's continued weakness is a cause for concern. Economic activity in April, as measured by the Imacec, fell 1.1% year-over-year, below market expectations—which stood at -0.5% y/y—and our own forecast (-0.8% y/y). Although the seasonally adjusted series showed no change, much of this result was driven by the performance of the mining sector, which, as we know, exhibits significant month-to-month volatility. In fact, just last month it had negatively impacted the aggregate index. Thus, if we exclude this extractive sector from the result, the well-known non-mining Imacec, we see that it showed a 1.6% year-over-year decline, due to a seasonally adjusted drop of 0.7% compared to March. Not encouraging at all.
However, that wasn’t the only issue. One of the most important markets for the economy—the labor market—is also struggling. Although the unemployment rate fell from 8.8% to 8.7%, the broader picture isn’t quite as positive. In fact, although there was a slight increase in employment (1,000 jobs), the drop in unemployment was largely due to people leaving the labor force (15,000). By category, salaried workers in both the public and private sectors lost 35,000 jobs, which were offset by job creation among the self-employed. It is true that during this time of year there is a seasonal component that historically explains these results, but this time it is not just that, as the seasonally adjusted unemployment rate is on the rise.
In this context, quite a few voices have begun to voice their expectations regarding a cycle of rate cuts by the Central Bank. Economic weakness would seem to be sufficient evidence that the rate should be lowered. Don’t get me wrong—I probably would have thought the same way a while back, or under “normal” circumstances, but that’s not the reality today. The economic weakness did not begin with these figures; it has been on the table for about a year, and inflation has shown no signs of letting up during this period. I agree that the April CPI figures were encouraging, but they are still just one data point in a series that has not been known for generating trends based on a single figure. An imminent announcement of a rate cut strikes me as too risky a gamble as the Central Bank works to regain public confidence. One misstep could prove too costly.
Therefore, as we mentioned in previous columns, in trying to gauge the Council’s stance, I see it as much more likely that it will adopt a more conservative approach—one that, if warranted, would prefer to cut more aggressively when the time comes, rather than starting with more tentative cuts out of fear of making a mistake. Economic weakness is a necessary condition, but not a sufficient one. Thus, we maintain our projection that we may see changes to the TPM in September, and not before.
