Itaú BBA - Activity growth remains below potential in Chile

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Activity growth remains below potential in Chile

June 6, 2019

Activity in the primary sector is expected to improve ahead but we see clear downside risks to our 3% growth outlook.

Talk of the Day


Activity has grown below potential in April, as has been the case so far this year. The monthly GDP proxy (Imacec) increased 2.1% yoy in April (1.8% in March), in line with market consensus and a tick above our 1.9% call. Growth was aided by a mining recovery, while services still lead the rest of the economy. Given the weak start to the year and also considering external developments, the central bank is likely to reduce its current 3%-4% growth forecast for this year when it publishes the 2Q Inflation Report (on June 10). Overall, the growth outlook, coupled with still-low inflation, could warrant changes to the current guidance for monetary policy ahead.
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Day Ahead: April’s nominal wage growth will be released at 10:00 AM. The index posted a strong 4.8% year-over-year in March, resulting in a real wage expansion of 2.3%. Signs of wage growth recovery, along with low inflation (expected to stay below the central bank’s 3% target this year) and an expansionary monetary policy, would support consumption ahead.


Yesterday, two agencies worsened their assessment on Mexico’s sovereign rating. Moody's decision to change the outlook to negative on Mexico's A3 ratings reflects the rating agency's concern that the policy framework is weakening in two key respects, with potential negative implications for growth and debt. First, unpredictable policymaking is undermining investor confidence and medium-term economic prospects. Second, lower growth, together with changes to energy policy and the role of PEMEX, introduce risks to Mexico's medium-term fiscal outlook, notwithstanding the government's near-term commitment to prudent fiscal policy. Although a rating upgrade is unlikely in the near future, a return to a stable outlook could result from regained confidence in the government's ability to lay out and implement predictable policies.

Fitch downgraded Mexico to BBB, with the outlook revised to stable. In Fitch's view, meeting fiscal targets will become more difficult heading into 2020 and could result in tighter policy that creates a further headwind to growth. The president has pledged not to raise taxes before 2021. In 2020, the fiscal rule demands a further tightening of the public sector primary balance to 1.3% of GDP. Growth continues to underperform, and downside risks are magnified by threats by U.S. President Trump to impose tariffs on Mexico from June 10 (starting at 5% and rising by a further 5% per month up to a potential 25%) to compel it to stop the flow of migrants across its territory into the U.S., amid a pattern of trade uncertainty. The downgrade of Mexico's IDRs reflects a combination of the increased risk to the sovereign's public finances from Pemex's deteriorating credit profile together with ongoing weakness in the macroeconomic outlook, which is exacerbated by external threats from trade tensions, some domestic policy uncertainty and ongoing fiscal constraints.

Day Ahead: The Statistics Institute (INEGI) will announce March’s gross fixed investment, which we expect to decrease 3.1% year-over-year in the period (from -1.9% in February).


In May, inflation came in at 0.31% mom, slightly below our 0.34% forecast and in line with market expectations. Housing (+0.43%) and food (+0.65%) divisions were the main contributors to price gains in the month. Meanwhile, communications (-0.06%) was a drag. On an annual basis, consumer price inflation picked up to 3.31% (3.25% in April), lifted by energy prices. Inflation excluding food and energy prices inched up to 3.00% (2.95% in the previous month). Within this group, durable goods, which include an important tradable component, remain a drag to inflation, as they fell 0.08% from last year (-0.17% previously). Meanwhile, non-durable goods inflation accelerated to 4.08%, from 3.89%. We are expecting inflation to end the year at 3.2%. The negative output gap and controlled inflation expectations would keep inflation at bay.


Day Ahead: May’s auto production (Anfavea) will be released at 11:20 AM.

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