IMF Significantly Cuts Chile's 2014 GDP Growth Rate Forecast

08 Apr 2014

The IMF has just cut Chile’s 2014 GDP growth forecast from a range of 3.75% - 4.75% to a range of  3.00% - 4.00%, citing a projected drop in private sector investment.   Given that the price of copper, Chile’s principal export, has been trending downwards since early April 2011 and many mining projects have been scaled back, it comes as no surprise that the IMF would now be taking a bearish view of private sector investment prospects.

While when looking at the prospects of the Chilean economy export volumes and prices have to been kept first and foremost in mind, domestic consumption, as in other Latin American economies that have grown quickly over the last decade, has becoming an increasingly important economic driver.   Consumer spending has trended up sharply over the last decade and now it is the highest it has ever been.   This trend interestingly has continued even through the global financial crisis and even though periods of high copper price volatility.

Looking forward over the rest of the year a key question will thus be what will happen with consumer spending.  If it continues increasing at current rates, the growth will have to be financed with credit.  While public sector debt levels in Chile are still low, private sector loans have increased approximately 30% over the last two years and are now at their historical high.  More importantly, general inflation figures in Chile mask the fact that the cost of many key expenditure items, such as housing expenses, have risen much faster than headline inflation rates.  This of course creates the likelihood of significantly increased demand for consumer credit.

All of this means when looking at negative GDP growth rate scenarios it has to be kept in mind that if copper prices do not recover and credit costs begin to rise to reflect increased default risk consumer spending may suddenly fall.  This could make the lower range of the IMF’s Chile GDP forecast more likely.