Even after accounting for the currency weakness, Chile's nominal exports and imports both fell sharply in May and there appears to be little respite from this weakness anytime soon. This presents considerable downside risk to growth forecasts in Q2 and 2015 (currently 2.4% yoy and 2.6%, respectively).



Both key growth drivers in the long run, investment and exports continue to struggle. Meanwhile, the positive contribution to growth from net exports is coming due to a significant decline in imports, another factor explaining the weakness in domestic demand growth.



Growth is surviving on counter-cyclical fiscal spending and falling imports. Counter-cyclical fiscal spending by the government could eventually lift employment growth and consumption spending and help the economy grow near the trend rate of ~3.0%.



However, the economy is much weaker now than it was a couple of years ago. Growth potential has declined to ~3.0% from more than 4.0%, and the substantial fiscal and monetary easing will fail to restore the potential unless it is supported by positive external shocks in the form of higher commodity demand and prices. Until then, it's difficult to see investment and exports improving meaningfully - the key drag to growth in the medium term.