Itaú BBA - Evening Edition – Weak activity in Chile

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Evening Edition – Weak activity in Chile

July 5, 2019

See our Week Ahead full note at the end of this report.

Talk of the Day


The monthly GDP proxy (Imacec) increased 2.3% yoy in May (2.1% in April), in line with expectations, and resulting in a year-to-date growth of 1.8% (5.1% in the same period of 2018). Activity growth remains below potential, but with some improvement in the non-mining component. Mining, on the other hand, returned to contraction in May (-2.3% yoy), after recording its first positive print for the year in the previous month, and is likely shrink further in June, considering the effects of a labor strike at a key mine. Meanwhile, services are still driving the rest of the economy, which grew 2.8% yoy in May (2.1% previously), the highest print so far this year. Activity increased 3.4% qoq/saar in the quarter ended in May, following a notably weak zero-growth in 1Q19. Despite the expected recovery in 2H19, the output gap is set to widen this year, limiting inflationary pressures and emboldening our call of further monetary easing by the central bank (2% yearend rate). Downbeat private sentiment, an uncertain global scenario and contained copper prices justify our call for growth of 2.4% this year (4% for 2018). The two-week labor strike at a key Codelco mine in June means that activity in the 1H19 is likely to come in around 2.0%. ** Full story here.

Confidence fell in June. The GFK consumer confidence index moved further into pessimistic territory in the month, recording 37.8 points, the lowest June reading since 2017 (52.7 one year earlier). All five sub-indexes deteriorated over 12 months, and now sit below neutral levels. Consumers have been pessimistic for eleven months, with the main drag coming from the 5-year perspective for the economy, which recorded the lowest historical print, 20.5, a sharp drop from 39.3 one year ago (and the 20 year average of 34). The twelve-month economic perspective retreated 18.7 points to 42.6 (61.3 in June 2018), with the current economic situation falling 13.8 points to 38.1 (from 51.9). Meanwhile the personal situation dropped 12.2 points to 37.8, the lowest reading since 2017. The below-neutral confidence levels, an uncertain global scenario and contained copper prices, justify our growth forecast of 2.4% this year (4% by 2018).

Wage growth endured in May. Nominal wages gained 5.1% yoy (in line with April’s growth), resulting in a real wage expansion of 2.3% (2.6% in April). In the quarter ended in May, nominal wages grew 5.0% (4.3% in the first quarter), while real wages inched up to 2.4% (2.3% earlier). The real wage bill (considering only salaried employment), expanded 3.8% in the quarter (3.1% in 1Q19). Dynamic wages, still low inflation and an expansionary monetary policy, would partly counter pessimism and be supportive of consumption ahead.


Gross fixed investment contracted 5.7% yoy in April, below our forecast of -4.0% and broadly in line with market expectations of -5.6%. According to calendar adjusted figures, GFI kept contracting (-2.5% yoy in April, from -6.0% in March), taking the quarterly growth rate to -3.5% yoy (from -2.2% in March). At the margin, gross fixed investment weakened in the quarter ended in April, dragged by construction investment. According to seasonally adjusted figures, the quarter-over-quarter annualized rate (qoq/saar) deteriorated to -2.4% in April (from 6.8% in March). On another note, private consumption expanded increased 0.2% yoy in April, from 0.6% in March. According to calendar adjusted figures, private consumption grew at a faster rate (1.3% yoy), but growth remained at a below trend pace, taking the quarterly growth rate to 0.8% yoy (from 1.2% in March). At the margin, private consumption momentum remained weak. 

We expect economic activity to slow to 1.0% in 2019, from 2.0% in 2018. Uncertainty over the direction of domestic policy and trade relations with the US will weigh on the investment outlook. Moreover, weaker U.S. economic growth will likely keep growth below potential. In the short term, lower public spending is also playing against activity. In this context, employment is weakening. On the other hand, recent real wage increases are a buffer for activity, sustaining the real wage bill and can smooth the consumption slowdown ahead. ** Full story here.


Lower House lawmakers approved yesterday the rapporteur’s proposal for the pension reform at the Special Committee. 36 members voted in favor and 13 against its approval. The committee also voted the report amendments, and the bill now heads to the Lower House floor, which will probably start to analyze the proposal on Tuesday.

The Week Ahead in LatAm


On economic activity, May’s retail sales will be released on Thursday. We expect a 0.4% mom/sa growth in the broad indicator, and a 0.2% mom/sa gain in core retail sales. For the service sector revenue survey, to be released on Friday, we forecast a 0.5% mom/sa decline in May, but this estimate may change depending on the retail indicator. Additionally, traffic of heavy vehicles (ABCR) and paper cardboard dispatches (ABPO), indicators related to June’s industrial production, may also come through next week, without a specified date.

June’s IPCA inflation will be released on Wednesday. We forecast a 0.01% monthly drop in prices, leading the 12-month reading to 3.35% (from 4.66% in May). The significant deceleration in the yearly indicator is partly explained by the low monthly reading forecast, and partly because the 1.26% jump seen in June 2018 (due to the truckers' stoppages in the previous month) will be excluded from the 12-month calculation. Food consumed at home, electricity bills and auto fuels are likely to post monthly deflation rates in the period. We expect food prices to continue to post negative results due to the seasonality of the dry period; electricity prices are likely to decline due to the green mode in the tariff flag system applied to electricity bills, after yellow mode in May; and, finally, fuel prices are likely to drop after Petrobras cut prices at the refineries gates for both gasoline and diesel.

Finally, on the political front, attentions will be completely focused the pension reform. As the special committee approved the rapporteur’s proposal, the bill now heads to a climax with the first vote in the Lower House floor. Speaker Rodrigo Maia has signaled that they will begin to analyze the proposal on Tuesday, and said to newspapers that he expects the first round of voting to be concluded before the Congressional break (July 18-31). It will be important to monitor how the discussions evolve in order to gauge whether or not this schedule will hold.


On Monday, inflation for the month of June will be released. Inflation in May came in above market expectations, with the surprise explained by a higher seasonal rise in volatile tourism package prices. Annual inflation moved up 0.3 pp, to a still-low 2.3%, while core measures were broadly unchanged and our diffusion index is at low levels. High frequency price tracking points to consumer prices falling 0.1% from May (+0.1% last year), dragged down by the seasonal drop in apparel prices, air transportation and tourism packages. The decline would be partly offset by meat produce, electricity tariffs and condominium expenses. As a result, annual inflation would moderate to 2.2% (3% target).

The central bank will publish the trade balance for the month of June on Monday. A seventh consecutive trade surplus was recorded in May, yet the rolling 12-month balance continued to gradually narrow (to USD 3.7 billion from USD 4.7 billion in 2018, USD 7.4 billion in 2017) as both mining and industrial exports shrunk (symptoms of weakening global demand). We expect a trade surplus of USD 475 million in June (USD 297 million one year earlier), with the effect of still-weak mining exports being offset by a sharper decline in consumer and intermediate goods imports. 


On Tuesday, INEGI (the statistics institute) will publish CPI inflation corresponding to the full-month of June, which we expect to come in at 0.07% month-over-month (from 0.39% a year ago). Lower energy prices are expected to put downward pressure on the monthly figure. Assuming our forecast is correct, headline CPI would decelerate to 3.95% year-over-year (from 4.28% in May), crossing below the upper band of the range around central bank’s target.

On Thursday, Mexico’s Central Bank (Banxico) will publish the minutes of June’s monetary policy meeting (held two weeks before), when the majority of board members voted to leave the policy rate unchanged at 8.25%. The minutes will likely confirm Deputy Governor Esquivel was the member that voted for a 25 bp cut, as he had already been calling for a more neutral stance. We also expect the minutes to discuss a widening of slack conditions and a more balanced stance of risks for inflation, potentially opening the doors for an easing cycle starting in the near term.  

Ending the week, the Statistics Institute (INEGI) will publish May’s industrial production. We estimate industrial production decreased 0.6% year-over-year (from -2.9% in April). Recent data shows the coincident indicator, oil output, kept contracting on a year-over-year basis, while manufacturing exports improved in May. In turn, vehicle production decelerated during the same period.


On Thursday, the Central Bank of Peru (BCRP) will publish its July’s decision on the reference rate, which we expect to remain unchanged at 2.75%. We expect the BCRP to discuss the impact on the economy from trade wars (US/China) to decide on potential future rate cuts, as recently mentioned by Julio Velarde, BCRP President. Rate cuts by the Fed would also give the BCRP room to act. We expect the central bank to cut the policy rate during the second half of 2019 to a level of 2.25% (through two 25-bp rate cuts).

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