Fears of a pronounced slowdown in China have eased, and indicators point to a stabilization of output. Other emerging Asian economies are also signaling an improvement. In Latin America, the strong growth of Peru contrasts with the deceleration in Colombia and slow growth in Brazil and Argentina. The growth rates of other developed economies and commodity exporters have been affected by fiscal processes and lower prices of some of their exports, simultaneously with high current-account deficits. From December, the baseline scenario of this Report corrects the growth projection for our trading partners upward to an average of 3.9% in the forecast horizon, the first upward revision in over a year. Global financial conditions have improved in recent months, partly reflecting a perception of lower probability of occurrence of extreme scenarios, particularly in the U.S., after learning that only some of the drastic fiscal adjustments previously approved will take effect. The greater confidence was reflected in greater preference for variable-income assets in developed economies, where long-term interest rates and stock prices have risen. The U.S. dollar has appreciated since December, mainly against the yen, reflecting expectations of a more expansionary monetary policy in Japan. Most of the currencies of emerging economies, including the Chilean peso, have appreciated against the dollar in the same time span. BIS central bankers’ speeches  3  The gasoline price has risen substantially this year so far, largely because of supply-side factors. This results in an upward revision of its forecast for this year and next.

Earlier episodes of balance of payments crises have typically been associated with high debt and liquidity and currency mismatches, which leave economies vulnerable to abrupt deterioration of international financial conditions. In Chile, the present current account deficit is being financed mainly by FDI flows, associated with reinvested earnings and new investments, thus providing more strength to the capital account. Despite these factors, we need to remain vigilant because an economic scenario like the present one can favor the incubation of future risks. Domestically, a scenario of very dynamic final sales and personal income, low unemployment and high utilization of installed capacity,  BIS central bankers’ speeches  1  can exacerbate the response of domestic demand and further expand the current account deficit. Abroad, the present abundance of international funding as a result of expansionary monetary policies in developed economies may facilitate the financing of the external deficit and push asset prices up, at the expense of incubating vulnerabilities for the future. All this means that we must be particularly alert to prevent financial vulnerabilities from incubating, since these situations can lead to higher leverage of households, firms and financial intermediaries, as well as currency and liquidity mismatches. In this regard, one reassuring element is that in recent months there has been a moderation in household indebtedness, which in any case has remained in line with the income trajectory. It is also important to continue to monitor the evolution of key financial prices and their interaction with lending.