However, more prolonged damage and a slower recovery cannot be ruled out if containment measures are kept for too long, beyond the authorities’ strengthened efforts of impact mitigation. Thus, during the last week of February and the first half of March, the growing fear in the financial markets triggered an increase in demand for safe assets, which contributed to a widespread fall in stock markets, a compression of long-term interest rates, an appreciation of the dollar and across-the-board falls in commodity prices. Towards the second half of March an increase in the demand for liquidity in dollars was observed, to the detriment of practically every other asset class. This reflects the strong preference for cash as households, businesses, banks, and financial intermediaries anticipate significant cash needs for the coming months. Emerging economies have suffered from currency depreciation, capital outflows, sharp falls in stock prices and rising risk indicators. In any case, in recent days there has been a partial reversal of these phenomena, as a reaction to the measures announced by various policymakers (Figure 1). Chile has also felt the effects of the global financial turbulence. Our currency has depreciated, the stock market has deteriorated markedly, sovereign risk spreads have widened, and long-term interest rates have risen. Even so, these movements have been more moderate than they have been in comparable economies, which seems to recognize our stronger macroeconomic fundamentals, the role of the exchange rate as a shock absorber and greater policy space to tackle the crisis (Figures 2 and 3).

The steeper projected drop in investment considers shutdowns at several sites due to the sanitary crisis and the fact that companies have been re-evaluating their planned investment projects, which is consistent with the findings of the Bank’s survey. These showed that a non-negligible fraction of the respondents shelved their investment plans for this year and about half were having second thoughts about their execution. The projection also contemplates a near 2% contraction in consumption during 2020 with its private component being more concentrated in durables. This is in line with the significant depreciation of the peso and the double-digit drop in consumer goods imports in the early months of this year. The recovery of consumption will depend especially on the evolution of employment and income, and how companies manage to live through the most critical period without destroying a significant number of jobs. Chile’s exports will also shrink in 2020, reflecting the reduction in trade flows associated with the world recession. Actually, already in February and March they posted year-on-year drops. Imports will contract too due to weaken domestic demand. Thus, the substantial adjustment in business and household spending will not be compensated by the government’s savings depletion implicit in the announced fiscal package, so this year the current account balance will become marginally positive (Figure 9). 5  The medium-term inflation trajectory will be dominated by the sharp widening of the activity gap projected in the scenario just described.