Fynsa
As we have previously noted in this column, the economy is not currently in the best of shape. The weakness seen during the first quarter was attributed primarily to sectors linked to natural resources and their supply chains, such as fishing and food manufacturing. This, combined with the fact that copper production has not recovered since the accident at El Teniente, makes it quite challenging to establish a baseline from which to show improvement.
However, recently, we have seen a sort of normalization of the shock in supply-side sectors, but a slowdown in demand-side sectors. Retail and services are still in the black, but it’s becoming increasingly difficult to maintain those figures. We find this concerning, because much of the optimism for the second half of the year was based precisely on the expectation that these sectors would perform better.
It is in this context that May’s Imacec does little to boost sentiment. For the fifth consecutive time, economic activity showed a year-over-year decline, this time of 0.9%. Additionally, the seasonally adjusted series declined by 0.2% month-over-month, confirming the aforementioned slowdown. Moreover, if the reader believes that mining is still to “blame,” that is only half the story: year-over-year, it fell by 11.6%, but on a seasonally adjusted basis compared to the previous month, it expanded by 0.7%. Meanwhile, the non-mining Imacec showed growth of 0.7% year-over-year, but declined by 0.3% month-over-month, primarily due to weak performance in industry, other goods, and services.
Given all of the above, achieving growth in the mid-range of the Central Bank’s recent projections becomes quite challenging. Not only because of the arithmetic behind it (I’ll explain why later), but also because there are no clear signs that this situation is close to reversing. The labor market remains fragile, due to both cyclical and structural factors; external tensions are preventing an improvement in confidence; and the anticipated reconstruction reform (whose potential impact on growth may be overestimated) is making slow progress through the legislative process.
Based on the figures available so far, to achieve 2.0% growth, the country would need to expand at an average monthly rate of 300% above its potential trend (~0.24% m/m). As a reference, the average for the first five months of the year was -0.1% m/m. If we take a more conservative—yet still optimistic—view, and grow in the coming months at a rate that “only” doubles the potential rate, we could reach 1.0%. I’m not saying it’s impossible, but I am saying that by 2026, it will be extremely challenging to reach the figures that were projected just a few months ago. If we’re to expect a significant recovery, we’ll likely have to look toward 2027.
In closing, and because every time quarterly data shows negative figures, the debate over a possible “technical recession” resurfaces (which, in my opinion, is an oversimplification of what a recession really is), it’s worth putting the figures into perspective. For the economy to meet that definition, it would need to post a seasonally adjusted decline of at least 0.3% in June compared to May. In other words, if annual growth were below approximately 0.4% (give or take a few tenths of a percentage point), we would fall under that dreaded definition. This time around, the mining sector should help; the question is whether the rest of the sectors will manage to reverse the negative trend. We’ll be watching closely.
