Itaú BBA - Evening Edition – Weak activity start in Chile

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Evening Edition – Weak activity start in Chile

May 20, 2019

Depressed private sentiment and a slowing global economy mean Chile’s growth risks are tilted to the downside.

Talk of the Day


Following the activity rebound in 4Q18 (3.6% yoy), GDP grew only 1.6% in 1Q19. The reading was the lowest since 2Q17, below the 1.8% expansion implied from the monthly GDP proxy (Imacec). Mining, along with other volatile primary sectors, dragged activity down in the quarter. Meanwhile, on the demand side, total consumption was broadly stable, but slowing investment and a more negative net export contribution hampered growth. The weaker investment is concerning, as growth outlook for the year depends on its robust performance. With the consolidation of the activity recovery faltering, and inflation under control, the central bank is likely to retain current levels of monetary stimulus for a prolonged period. After a weak start to the year, depressed private sentiment and a slowing global economy, risks to Chile’s growth outlook are tilted to the downside. We see growth of 3.0% for this year, down from 4.0% last year. Activity would be aided by an environment of low inflation, expansionary monetary policy and signs of some labor market recovery, along with a possible improvement of primary sectors.
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In 1Q19, the current account balance came in at USD 1.0 billion, but external vulnerability remains elevated. The rolling four-quarter current account balance deficit widened to 3.4% of GDP (from 3.1% in 2018), the widest since early 2014. Positively, the seasonally adjusted series show the deficit at a narrower 2.7% of GDP (4.8% in 4Q18), aided by an improving trade balance of goods and services and a narrower primary deficit at the margin. Meanwhile, financing the deficit remains complicated as inflows of direct investment stayed low. We expect the current-account deficit to remain wide and broadly stable this year, at 3% of GDP. The effect of a slowing global activity would be most likely offset by a weakening domestic demand, so further widening is unlikely.
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Presenting the Inflation Report, General Manager Echavarria downplayed the increase in inflation expectations, noting that the board was unperturbed by a COP depreciation of around 8%-15%, and stable interest rates for some time would be ideal. The central bank seems comfortable with the inflation development, noting the transitory nature of shocks that pulled up consumer prices in recent months. Additionally, Echavarria noted the recent pass-through effect has been historically low, and inflationary pressures from the exchange rate weakening are not a concern. For 2019, the technical staff foresees inflation at 3.2%, in line with our estimation. Meanwhile, Echavarria noted the 2.8% yoy activity growth for 1Q19 was below internal estimates (as construction underwhelmed), but the forecast for the whole year remained stable at 3.5% (our call: 3.1%). The General Manager was concerned about the internal demand dynamic and construction weakness. On the external front, Echavarría remarked the positive evolution of terms of trade, but it is worrying that exports have not risen along with the COP weakening (likely a reflection of slowing global demand amid the rising trade war uncertainties). On the political front, polarization is seen as a concern that could affect confidence. Overall, Echavarria does not see a scenario applicable for more monetary stimulus. In fact, he signaled that the next move of the bank likely remains a hike, as he expressed comfort with the market’s view of a hike later this year. Nevertheless, the overall message was that stable rates for a “long time” is the base case scenario, in line with our outlook (4.25% throughout this year and the next). In our view, with inflation controlled, inflation expectations anchored, monetary policy rate close to neutral and the pace of growth recovery still restrained, we believe that the central bank will remain on hold. The next monetary policy meeting will be held on June 21.


According to the BCB’s weekly survey with market participants (Focus), the median of GDP growth forecasts for 2019 dropped 21 bps (to 1.24%), extending its declining trend for the 12th consecutive week. Weak activity indicators, uncertainty associated with the implementation of reforms and falling confidence may have impacted the result. GDP growth forecasts for 2020 and 2021 remained stable at 2.50%. The median of IPCA inflation expectations increased 3 bps to 4.07% for 2019, while it has remained flat at 4.00% for 2020 and 3.75% for 2021. The year-end Selic rate did not change for 2019 (at 6.50%) and 2021 (at 8.00%), but declined to 7.25% for 2020 (from 7.50%). The median of exchange rate increased to BRL 3.80/USD for 2019 (from 3.75), remained flat at BRL 3.80/USD for 2020, and oscillated to BRL 3.85/USD for 2021 (from 3.83).

Tomorrow’s Agenda: FGV’s industrial confidence (preview) index for May will be released at 8:00 AM.


Tomorrow’s Agenda: The statistics institute (INEI) will announce GDP growth for 1Q19. We expect a 2.3% growth in 1Q19 (from 4.8% in 4Q18), in line with the first three results of the GDP monthly proxy.

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