The International Monetary Fund has consistently raised its global growth forecasts for 2017 and 2018, which now stand at 3.6% and 3.7% respectively, with economic activity increasing in a generalized, synchronized way. This improvement in the cycle allows for the withdrawal of the monetary stimulus, which began in late 2015 and delivered three increases in rates in the US over the past year – to continue during 2018. Along with the tax reforms driven by President Trump, this should boost rates around the world.
In Europe, the economic recovery has been very encouraging, which, together with the containment of political risks following the victories of Macron in France and Merkel in Germany, has elevated the activity and confidence indexes to historic highs.
The emerging world also looks promising. The IMF growth forecast for this region is 4.6% for 2017 and 4.9% for 2018 (having grown 4.3% in 2016). Highlights include the end of the 2016 recession in Latin America, driven by higher activity in Brazil, and robust growth in emerging Asia, driven by China and India.
In Chile we had a reasonably busy year, characterized by low activity, dragged down by reduced investment and a worsening of the quality of sovereign credit, which caused a reduction in our risk rating for the first time since the country came under the magnifying glass of the rating agencies. Nevertheless, during the second half of the year we saw better growth prospects across our business partners, supported by upward corrections in the Central Bank’s latest reports. This resulted in the price of copper rising above US$ 3.0 per pound, ending 2017 at US$ 3.3 per pound, and the exchange rate falling to Ch$ 615 (~US$ 1), a drop of approximately 8% during the past year.
The Inflation rate was 2.3% in 2017, close to the lower limit of the Central Bank’s tolerance range. This figure was severely impacted by low inflation on consumer goods, and the appreciation of the Chilean Peso. However, no reductions are expected in the monetary policy rate (MPR) for 2018 since, according to the Central Bank, activity this year will be in the range of 2.5-3.5%, which would push inflation towards its target. According to surveys, this could take the MPR to 2.75% by year-end (from the current 2.5%).
In March 2018, President Sebastián Piñera starts his second term and will face serious economic challenges after a four-year period with average annual growth of 1.8%, well below Chile’s estimated potential output (approximately 2.5%). He will have the difficult task of achieving consensus to implement his program, which contemplates the reintegration of the tax system, the establishment of a productivity agenda, a pension reform and the convergence of structural income and expenditure to stabilize public debt.