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Weak activity in Chile

April 6, 2017

Activity in 1Q17 will likely be the weakest since the global financial crisis.

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The monthly GDP proxy (Imacec) for February was expectedly weak, dragged down by the extended labor strike at the country’s largest copper mine. The Imacec contracted 1.3% year-over-year, compared to the 1.4% drop expected by market consensus and our updated -1.5% forecast following the publication of sector data earlier this week. This is the lowest growth rate since October 2009, and follows the 1.4% rise at the start of the year. In addition to the supply shocks, activity was negatively affected by the leap-year effect. The mining drag on activity in the month added to the impact of one less working day. The 17.1% y/y decline in mining activity (previous: +0.1%) led the 1.3% headline contraction. Meanwhile, non-mining activity increased 0.2% (January: +1.6%) lifted by commerce and partly countered by shrinking manufacturing. At the margin, non-mining activity is progressing. From January, the seasonally adjusted index fell 0.7%, led by the 12.0% monthly decline in mining (-5.6% q/q vs. -7.7% in 4Q16). Meanwhile, non-mining activity expanded 0.3% from January and accelerated to 1.7% q/q, though this follows a very weak 4Q16 (-0.7% q/q). 

We expect activity to remain weak in March as the labor strike persisted into that month. As a result, activity in 1Q17 will likely be the weakest since the global financial crisis. We expect GDP growth of 1.8% this year, broadly in line with the 1.6% recorded last year. Higher copper prices, low inflation and further monetary easing will support activity. Meanwhile, the ongoing loosening of the labor market, less fiscal support and private sentiment that remains depressed will keep the recovery contained. ** Full story here.

Business confidence remains in pessimistic territory, hinting that an activity recovery ahead will likely be mild. Think-tank Icare published its business confidence index for March, which came in at 45.1 (50 is neutral), from the 42.8 one year ago (previous: 46.0). Confidence has now completed three full years in pessimistic territory. Construction confidence in still the lowest sub-index following the end of the tax-incentivized real estate boom. The commerce sub-index is neutral, as was the case one year ago. Low inflation and declining interest rates could lead to an improvement of this sub-index in the months ahead. In spite of the labor strike at Escondida in February and March, mining confidence remains elevated at 61.4 as copper prices stabilize at improved levels. Once the volatile mining confidence is excluded, business confidence sits at 41.3 (March 2016: 41.8). We expect an activit y recovery to 1.8% this year, from the 1.6% for 2016, with depressed private sentiment - and resulting subdued investment - playing an important role in the mild recovery.


Disinflation advanced in March, with consumer price inflation falling below 5% for the first time since August 2015. In the month, prices gained 0.47%, well below the 0.94% monthly gain recorded one year prior, falling between our 0.44% forecast and the 0.51% market estimation. All major categories increased from the previous month, with household related expenditures, transport, communications, and other expenditures explaining the bulk of the gain (+0.36 pp). Food prices increased by just 0.11% from February (0.48% in March 2016), so when this group is excluded, consumer prices gained 0.62% month-over-month (0.66% one year before). Tradable goods prices (excluding food and regulated items) 0.85% gain came below that recorded one year ago (1.00%) amid a more stable currency, while non-tradable prices (also excluding food and regulated items) picked up to 0.51% (0.25%, one year prior). On an annual basis, inflation came in at 4.69%, below the 5.18% recorded in February. Household expenditures and food prices are still leading the annual gain (+2.49 pp contribution), but less so than in previous months. Excluding food prices, inflation came in at 5.13% (5.17% in February). If food and regulated prices are excluded, tradable inflation fell to 5.59% (5.75% in the previous month), while non-tradable inflation inched up to 5.33% from 5.06%, likely affected by the VAT increase in the previous month. As activity remains weak and the currency more stable than in recent months, we see inflation will continue to decelerate through the year, reaching 4.1% by yearend. This would allow the central bank to proceed with the monetary loosening cycle that began late last year, such that we see the policy rate ending this year at 5.5%.


Mexico's gross fixed investment weakened in January. It contracted 0.5% y/y, undershooting our forecast of a modest expansion (0.3% y/y) and a more optimistic market consensus (0.8% y/y). At the margin, seasonally-adjusted gross fixed investment fell 1.6% from the previous month, with quarter-over-quarter annualized growth falling to negative terrain (-1.5%; December 2016: 1.2% q/q). Both construction investment and investment in machinery & equipment contracted at the margin. Uncertainty is having an impact on investment decisions. Even though the tension between the U.S. and Mexico has moderated somewhat, we still foresee weaker investment down the road.

Consumer confidence continued recovering timidly. The index went to 81 in March (February: 75.7), after hitting an historical low of 68.5 in January (amid the spike of gasoline prices and tension in bilateral relations with the U.S.). Nevertheless, the 3-month moving average growth rate of consumer confidence went further below to -16.7% y/y (February: 16.2%). Granted, the uncertainty surrounding bilateral relation with the U.S. has moderated - which has improved sentiment a bit - but it is still present. In spite of the improvement, consumer confidence remains at a very low level. The implication for the economy is that depressed consumer sentiment can have negative effects on activity. According to conventional macro theory, if households expect lower future income (i.e. threat of losing job) or suffer a fall in their wealth (i.e. deterioration of balance sheets) that would be conducive to l ess consumer spending in the short-run, as people try to save more and spend less (in anticipation of tougher times ahead). 


Global Monetary Policy Monitor: Mexico and South America in opposite trends. In March, there were monetary policy decisions in 26 of the 33 countries we monitor. For another month, the number of central banks hiking interest rates was equal to the number of central banks cutting rates. On the contractionary side, the US and Mexican central banks hiked rates by 25bps, while in China several interest rates were up. On the expansionary side, Chile and Colombia reduced rates by 25bps, in line with expectations, and the Russian central bank surprised the market with a 25-bp rate cut (when it was expected to stay on hold). We expect the monetary easing process to continue in South America: we forecast additional cuts in Brazil, Chile, Colombia and Argentina. In April, we highlight the Brazil’s monetary policy meeting. We expect the BCB to accelerate the pace of interest rate cuts to 100 bps, bringing the Selic rate to 11.25%. In Mexico, the pace of monetary tightening is slowing, consistent with the more favorable behavior of the exchange rate and real interest rates already at a contractionary level. We expect two additional rate hikes (25 bps) in Mexico this year, before the cycle ends. ** Full story here.

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