Boston, MA -- (SBWire) -- 07/11/2013 --We continue to expect a pronounced shift in the Chilean economy in 2013, and forecast real GDP growth to fall from 5.6% in 2012 to just 4.3% this year and average 4.2% from 2014-2017, which is below consensus estimates. This slowdown in growth is attributable to decelerating economic activity in China, which over the next several years will result in weakening real demand for Chilean copper exports and reduced investment into the country's mining sector.
We expect the Banco Central de Chile (BCC) to begin monetary easing in H213, cutting rates from 5.00% to 4.50% by end-2013 and 4.00% by end-2014, as a slowing Chinese economy weighs on Chile's exports and drags on GDP. We believe low consumer price inflation gives the BCC plenty of room to cut, and see both supply- and demand-side price pressure remaining subdued over the medium term.
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With the return of former president Michelle Bachelet as its standard bearer, the Concertacion de Partidos por la Democracia is likely to win Chile's presidential election in November, paving the way for a return of a centre-left government. We expect income distribution and education to feature prominently throughout the election campaign.
Declining external demand for Chilean mining exports has already seen a shift into current account shortfalls, which we expect to remain in place over our 10-year forecast period. Weakening Chinese demand for copper and an already disappointing performance in Q113 mean that we see the current account shortfall widening to 4.0% of GDP in 2013, up from 3.5% in 2012.
We expect Chile to remain a model of fiscal rectitude in Latin America over the next few years. While we believe lower copper prices and a weaker economy will depress revenue growth, we continue to forecast persistent, although narrowing, primary budget surpluses over our 10-year forecast period.
Major Forecast Changes
We have revised up our 2013 average peso spot rate from CLP478.50/ US$ to CLP477.50/US$, as a recent drop in oil prices relative to copper has improved Chile's terms of trade, placing appreciatory pressure on the peso in the near term. However, we believe this dynamic is temporary, and does not indicate a fundamental shift in the country's trade dynamics. We therefore maintain our core view of currency weakness in H213, amid diminishing demand from China.
Key Risks To Outlook
Upside Risks To Real GDP Growth Outlook: Despite weakening copper exports, if real private consumption and gross fixed capital formation growth remained strong, real GDP growth could exceed our real GDP growth forecast of 4.3% in 2013 and 4.6% in 2014.
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New Market Study Published: Chile Business Forecast Report Q3 2013
New Country Reports market report from Business Monitor International: "Chile Business Forecast Report Q3 2013"