Omnibus closer to approval, but further from working its magic
Recent data points to further weakness in domestic activity. Mining and manufacturing explained most of the contraction, but the pace of expansion remained weak, even when these sectors are excluded. Consumption-related indicators were somewhat more resilient. The picture is increasingly gloomy, with consumer and business confidence deteriorating further, and investment expectations weakening across sectors.
Against this backdrop, we have revised our 2026 GDP growth forecast downward. The June IPOM also lowered the growth projection for 2026. For 2027, we continue to expect a rebound based on stronger investment in mining projects, the implementation of deregulation measures, the fading of temporary negative factors and the favorable terms of trade.
Employment remains broadly stagnant, and the unemployment rate is rising. The composition of employment has also deteriorated, pointing not only to a weaker labor market but also to lower job quality. Real wage growth has slowed, reflecting the burden of higher gasoline prices on household purchasing power.
The latest CPI again surprised to the downside, suggesting that the fuel-price shock has not spread. Food prices are still contained, reducing concern over one of the main potential propagation channels. Underlying inflation signals remain largely consistent with limited pass-through, although services remain the main source of inflation persistence.
The Central Bank used the IPOM to contain expectations in both directions. Until the direction of the next policy move becomes clearer, the TPM is likely to remain at 4.5%. With pass-through still contained, the shock does not justify an increase in the TPM. The IPOM also pushes back against the opposite interpretation: that weak activity should lead to a more expansionary monetary policy.
Opposition lawmakers are increasingly concerned that the provisions of President José Antonio Kast’s reconstruction bill could enlarge the budget deficit, and lead to faster debt accumulation. The government continues to insist that the changes are necessary for boosting a sluggish economy. As it makes its way through Congress, the bill has remained largely intact. However, as the bill enters its final stretch, ongoing judicial investigations involving three senators could alter the government’s already fragile majority, if one or more of these legislators is sanctioned before the final vote. This creates strong incentives for the government to accelerate negotiations, and to potentially accept additional concessions.
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