Fynsa
A classic tradition at this time of year is to start making plans for the year ahead. This happens in every area of life: politics, sports, social life, romance, and so on. Of course, the economy is no exception, although expectations regarding its performance certainly didn’t just start now.
Given this, I wanted to summarize our main projections for 2023, even if it means I might be called out on them in twelve months.
In terms of growth, it will not be a positive year. The slowdown in economic activity observed in 2022 was not as strongly reflected in the numbers, except in the last few months. This trend will not change, except that now the comparison bases will no longer be favorable, which will be particularly true for the services sector. Thus, with perhaps the occasional outlier, economic activity will likely remain in the red until the third quarter. All in all, compared to the year that just ended, GDP is expected to fall by around 1%.
Inflation was the most important economic issue for Chileans in 2022, following many years of stability stemming from solid macroeconomic (and, let’s not shy away from saying it, political) institutions. Hunger met with a desire to eat, and excessive local liquidity, combined with the sharp rise in international prices—including currency depreciation—created a toxic cocktail for our usual inflationary calm. The year ended with a 12.8% increase in the CPI, although some categories that are more sensitive to the public saw much steeper increases (such as food and transportation).
While it is true that rising prices should ease somewhat in 2023, it is also true that this will not happen overnight. Several factors are working against this goal, such as price indexation, but also some long-delayed rate hikes that, at this point, are becoming unsustainable. Additionally, food price trends do not appear to be slowing down, and, together with fuel price trends, they will continue to pose a latent risk that must be taken into account. All in all, we expect the year-over-year change as of December of this year to be around 4.7%.
Finally, and in connection with the above, rates will remain high until there is more than enough evidence not to throw away the hard-won progress—achieved through blood, sweat, and tears by the Central Bank—that has brought the MPR up to 11.25%. According to our estimates, with this the Central Bank has implemented the most restrictive monetary policy since the return to democracy—including the subprime crisis.
Given the numerous risks we highlighted in the previous paragraph, it would seem more reasonable to adopt a “wait-and-see” strategy, even if that means reacting late to a sharper slowdown that becomes evident more quickly in local prices. Not everyone in the market shares our assessment; the consensus expects rate cuts to begin during the second quarter. For our part, we believe that this process will not begin until June or July, ending in December at around 8%.
Keep this column for twelve months and let's see how it goes.
