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Chilean recovery in place

May 8, 2018

The Chilean recovery advanced in the first quarter of 2018

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The Chilean recovery advanced in the first quarter of 2018, boosted by a temporary mining production increase, while core activity is showing favorable signs. The 4.0% growth rate recorded in the quarter (2.5% in 4Q17) is the highest since 3Q13. After correcting for seasonal and calendar effects, growth in the quarter was 5.0% (3.3% in 4Q17), the most elevated since 3Q12. The March Imacec (monthly GDP proxy) surprised to the upside. The 4.6% annual growth was superior to the Bloomberg market consensus of 3.9% and our 4.0% call. The 31.7% (19.4% in February) mining rise was the growth engine in the month, while commerce and services lifted non-mining activity to 2.9% (2.8% in February). The month of March was penalized by two fewer working days. Therefore, activity was even more impressive once adjusted for calendar effects, rising 6.1% (with the improvement explained by the non-mining component). Recovering core activity is consistent with improving labor market data, optimistic private sentiment, low inflation and an expansionary monetary policy.

Beyond base effects, activity is also performing well at the margin. Imacec gained 0.5% from February leading to growth accelerating to 4.6% qoq/saar in 1Q18, after a 2.7% print in 4Q17. We see GDP growth of 3.6% this year, more than doubling the 1.5% posted last year, as external and domestic tailwinds support the Chilean recovery. ** Full Story here.

Exports continue to outperform imports in Chile. The trade surplus of USD 983 million in April was larger than the USD 597 million recorded one year earlier and superior to our USD 800 million surplus forecast (Bloomberg market consensus: USD 750 million). Elevated mining exports, mainly aided by price, are the principal driver of the trade improvement along with firm global growth. The 12-month rolling trade surplus increased to USD 10.5 billion, from USD 7.9 billion in 2017 and USD 5.4 billion in 2016. Our seasonally adjusted series shows that, at the margin, the trade balance surplus is still high at USD 9.0 billion (annualized) in the quarter, although lower than the USD 9.6 billion in 1Q18 and USD 12.1 billion in 4Q17.

Total exports increased 24.9% in April (18.6% in March), lifted by mining and industrial goods. In the quarter ending in April, the 39.6% mining increase (30.8% in 4Q17) boosted total export growth to 26.3% (17.2% in 4Q17). Industrial and agriculture exports are both growing around 14%, recovering from 5.4% and -23.9%, respectively, in 4Q17. Total imports rose 19.6% in April (9.3% in March) as energy goods imports accelerated from 15.2% to 52.3% and consumer imports returned to double-digit growth. Meanwhile, capital goods imports rose 8.4% (6.4% previously), lifted by mining and construction machinery. In the quarter ending in April, total imports increased 14.2% (11.7% in 4Q17) as energy imports tick up to 27.1% (25.6% in 4Q17). Capital goods imports were 7.1% versus 4.5% the final quarter of last year. We expect the current account deficit to remain contained this year. Robust copper exports, partly offset by higher energy prices, support our view of a current account deficit similar to the 1.5% of GDP last year. ** Full Story here.

Wage disinflation is advancing following the prolonged period of low inflation. The historically merged wage index shows wage growth inched down to 2.9% year over year in March (from 3.2% in February; 4.2% in 2017), the lowest reading since the end of global financial crisis in 2010. Wage growth in the first quarter of the year was 3.2%, below the 4.1% recorded in 4Q17. Accordingly, real wage growth remained broadly flat at 1.2% in March (2% in 2017). Real growth in the quarter slowed to 1.2% from 2.1% in 4Q17 and 2.5% in 3Q17. Wage disinflation has led to a slowdown in the real wage bill growth to 3.4% in the quarter, from 4.4% in 4Q17 (4.9% in 3Q17) when total employment is considered. Nevertheless, when only salaried employment is included, the 3.8% growth is broadly stable from 4Q17 aided by the boost from the public and private sector. Low wage prints will keep the central bank vigilant of the evolution of core components of inflation, and the impact these have on the convergence of inflation to the 3% target range.

Day Ahead: Inflation for the month of April will be released at 8:00 AM (SP Time). We and the consensus expect consumer prices to gain 0.1% from March, leading to an annual inflation of 1.7% in the month.


The minutes of the April monetary policy meeting show a central bank that is balancing the expectation of a firm activity rebound with faster than anticipated disinflation and moderating inflation expectations. At the meeting, the board unanimously reduced the monetary policy rate by 25bps to 4.25%. Overall, the tone of the minutes is neutral, hinting that upcoming decisions will be data dependent. The recent upside inflation surprise in April will likely give General Manager Echavarria’s cautious message some additional weight, particularly since food partially led the surprise and has been flagged by Echavarria as a risk going forward.

The technical staff sees a notable activity recovery ahead. Growth of 2.7% this year, from 1.8% last year, with a further recovery to 3.7% next year is the baseline scenario. Favorable financing conditions, commodity prices and better global demand will aid the pick-up. The technical staff sees upside risks to growth this year on the back of better than expected oil prices. Meanwhile, the disinflation process has outpaced expectations. Board members point to the strong Colombian peso as a major reason behind this development as well as for the inflation expectation correction. However, it was noted that there is large uncertainty over future movements of the exchange rate. Nevertheless, a rate cut at the April meeting helped offset a rise in the real interest rate and keep it moderately expansionary, according to some members. We believe core inflationary pressures will continue to diminish, amid a negative output gap and a strong currency, providing room for an additional 25-bp rate cut to 4.0%. The next monetary policy meeting takes place on June 29. ** Full Story here.


Mexico’s gross fixed investment picked up in the first two months of 2018, in spite of the uncertainties looming in the economy, supported by the rebound of construction (partly reflecting post-earthquakes reconstruction works) and stronger investment in machinery & equipment. The monthly gross fixed investment indicator grew 4.8% year-over-year in February, slightly below our forecast (5%) and median market expectations (5.2%, as per Bloomberg). According to calendar-adjusted data reported by the statistics institute (INEGI), growth was also 4.8% and the three-month moving average growth rate increased to 2.5% year-over-year in February (the highest level in 22 months, from -0.5% in January). Looking at the same metric (calendar-adjusted 3mma), we note that investment in machinery & equipment expanded 3.3% year-ov er-year (from 0.4% year-over-year in January) while construction investment jumped to 2.2% year-over-year (the first positive print in 20 months, from -1% in January). 

Although the recent numbers point to a significant rebound of gross fixed investment in 1Q18, we expect this improvement to be short-lived. Coincident indicators – such as the public sector’s investment in physical capital (18.8 year-over-year in real terms in March and 7.6% in 1Q18, from a 26.3% contraction in 2017) and nominal imports of capital goods (36.1% qoq/saar in 1Q18, from 11% in 4Q17) – indicate that March’s result will also be strong. However, zooming out from the latest data, we still believe that the broader picture is consistent with a weakening of investment. Even though the uncertainty over NAFTA renegotiation has diminished, the uncertainty stemming from the presidential elections will likely be a drag on investment and tight macro policies (both fiscal and monetary) will continue restraining the growth of private and public capital expenditures. ** Full Story here.


According to Anfavea, auto production reached 266.1k in April, slightly above our forecast (263k). We estimate a 8.7% mom/sa increase, and the 3-month moving average up 2.2%. In yoy terms, auto production advanced 40.4%. The results were heavily impacted by abnormally high working days in April as its usual holidays happened by the end of March (Easter) or on Saturdays. Exports rose 10.7% mom/sa (19.5% yoy) and are roughly stable since 1Q17. Domestic sales rose 3.6% mom/sa , sustaining an upward trend. The production breakdown shows strong growth figures in both light vehicles (3m-ma up 2.1%) and trucks and buses (3m-ma up 4.7%). Inventories (measured as days of sales) declined to 22.8 from 23.2 - below the historical average of 23.5. Our preliminary forecast for April industrial production remains at 0.5% mom/sa (8.6% yoy).

The BCB released its weekly survey with market participants. Overall, little has changed relative to last week’s survey. Median GDP growth expectations for 2018 declined 5 bps to 2.70%, and did not change for 2019 and 2020 (at 3.00% and 2.50%, respectively). According to the Focus survey, IPCA inflation expectations remained flat for the three years horizon (2018 – 2020): at 3.49% for 2018, 4.03% for 2019, and 4.00% for 2020. The year-end Selic rate expectations were also unchanged for the three years horizon (2018-2020): 6.25% for 2018 and 8.00% for 2019 and 2020. Median forecasts for the exchange rate depreciated slightly to BRL 3.37/USD for 2018 (from 3.35), did not change for 2019 (at 3.40) and barely changed for 2020, to BRL 3.47/USD (from 3.46).

Day Ahead: The Central Bank announced the rollover of 8,900 FX swap contracts expiring in June 1st.


Day Ahead: The central bank will announce its biweekly monetary policy rate at 5:00 PM (SP Time). The central bank increased its policy rate (7-day repo) to 40% from 27.25% in three inter-meeting decisions since the last week of April. In the latest statement, the central bank repeated “it is ready to act again if necessary”. With a weaker currency and current higher interest rates, we and the consensus do not expect changes in the next meeting, but we note that Argentina remains vulnerable given its sizable external deficit (4.8% of GDP last year) and low reserves. So, the behavior of the exchange rate in coming days will remain a key determinant of the monetary policy. 


Global Monetary Policy Monitor. In April, there were monetary policy decisions in 17 of the 33 countries we monitor, with a rate cut in Colombia and rate hikes in Argentina and Turkey. As a result, there were slightly more central banks tightening than central banks cutting interest rates in the month, in contrast with the previous month. Colombian central bank cut the interest rate by 25 bps. In Turkey, the central bank raised the late liquidity rate, used for providing temporary liquidity to banks, by 75 bps, but left the benchmark rate unchanged. Argentina’s central bank surprised markets by increasing the base rate by 300 bps in an inter-meeting decision at the end of April, followed by two other increases (already in May), by 300 and 675 bps, in the midst of pressures on the exchange rate. Also in the beginning of May, the Fed stayed on hold, as expected, continuing to signal “further gradual” hikes over the coming months. In Chile, the central bank also kept interest rates unchanged. Over the coming weeks, the BOE is set to stay on hold, while in Brazil the BCB will likely deliver a final cut of 25 bps. ** Full Story here.

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