Itaú BBA - Evening Edition – Stronger-than-expected activity in Chile

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Evening Edition – Stronger-than-expected activity in Chile

March 18, 2019

For 2019, we see GDP growth moderating to 3.2%

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Activity rebounded in 4Q18, led by investment. Following the slowdown recorded in 3Q18, activity accelerated at the close of 2018 to its fastest pace since 3Q17. In 4Q18, activity grew 3.6%, up from the 2.6% recorded in 3Q18 (revised down from 2.8%). Overall, the improvement is broadly in line with the central bank’s view that the slowdown in 3Q18 was transitory. However, we believe that with the set of weaker activity indicators at the start of this year, along with short-term uncertainty over inflation dynamics and still elevated external risks, the central bank is likely to be cautious. For the 2018 full year, growth came in line with the widespread 4.0% expectation. For 2019, we see GDP growth moderating to 3.2%. 
** Full story here.

On external accounts, the consolidating domestic demand recovery and the rising income deficit led to a sharp widening of the current account deficit. The current account deficit in 4Q18 came in at USD 3.6 billion, far larger than the market consensus, at USD 2.4 billion. As a result, the current account deficit in 2018 was 3.1% of GDP (USD 9.2 billion), a marked widening from the upwardly revised deficit recorded in 2017 (now 2.1% of GDP from 1.5% initially). Our own seasonal adjustment shows that at the margin the current account deficit widened further (to 4.8% of GDP, annualized), compared to -2.7% in 3Q18. Meanwhile, financing the deficit is more complicated as inflows of direct investment only gradually increased from 2017, while portfolio flows into Chile nearly halved last year amid the risk-off sentiment sweeping across global markets. As the domestic demand continues to expand at a decent pace, we expect the current account deficit to remain wide, around 3% of GDP this year.
** Full story here.


The IBC-Br Activity Index decreased 0.4% mom/sa in January, below our call and the median of market expectations (both at -0.2%). According to BCB, relative to the same month in 2018, the index rose 0.8% (market consensus: 1.0%). On a quarterly basis, the index increased 0.2%. Overall, January was marked by mixed data. On one hand, industrial production and real revenues from services (PMS) declined 0.8% and 0.3%, respectively. On the other hand, retail sales climbed 0.4%. In our view, frailty in industrial activity partly reflects domestic factors (such as the lagged effects of tighter financial conditions) as well as loss of economic momentum in Brazil’s key trading partners. We expect a 2.0% GDP growth at the end of 2019.

The median of GDP growth expectations for 2019 decreased 27 bps, to 2.01% (according to the the BCB’s weekly survey with market participants – Focus). This result may have been impacted by activity indicators released last week, with moderate prints for January’s industrial production, retail and service sectors. Since the shy 4Q18’S GDP growth figures released in late February, expectations for 2019 have already dropped 47 bps. For 2020 and 2021, expectations remained stable at 2.80% and 2.50%, respectively. On the other hand, the median of IPCA inflation forecasts for 2019 increased to 3.89% (from 3.87% in the previous week), and remained stable for 2020 and 2021 at 4.0% and 3.75%, respectively. February’s IPCA figures, released on Tuesday, may have contributed to the small change – inflation climbed 0.43% in the month, above the highest of market expectations (0.42%). The year-end Selic rate expectations for 2019 and 2021 also remained flat at 6.5% and 8.0%, respectively, but decreased to 7.75% (from 8.0%) for 2020. The median of the forecasts for the exchange rate did not change for the three years horizon (2019-2021): at BRL 3.70/USD for 2019; at BRL 3.75/USD for 2020; at BRL 3.80/USD for 2021.


According to the central bank’s monthly analyst survey, inflation expectations are controlled and fewer rate hikes are expected. Following early surprise to the year, the 2019 inflation expectation edged down to 3.23% (3.41% previously; Itaú 3.0%). The 1-year horizon inflation outlook remained broadly stable at 3.30% (3.34% previously), while the 2-year horizon inflation expectation moved from 3.10% in February to 3.20%. Expectations for core inflation measures (excluding food prices) came in at 3.20% for a 1-year horizon (3.25% previously), while for the 2-year horizon they reached the 3.0% target (3.09% in February). On the monetary policy front, analysts now foresee just one rate increase this year (vs. two hikes previously) that will take place in September (delayed from June, according to the February survey). We too expect the board to keep the policy rate unchanged at 4.25% for the time being given controlled inflation, improving inflation expectations, an activity recovery that has yet to consolidate and a still risky external environment. We expect one hike during 2H19 taking the interest rate to 4.50%. The next monetary policy meeting will take place on Friday, March 22.

Tomorrow’s Agenda: Think-tank Fedesarrollo will release its consumer confidence index for February.

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