Itaú BBA - CHILE – Activity ends 2Q20 on a (marginally) better note

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CHILE – Activity ends 2Q20 on a (marginally) better note

August 3, 2020

As the country partially opens and the evolution of the coronavirus consolidates a favorable trend, an activity recovery is expected ahead

Activity posted another double-digit annual decline in June, completing the worst quarterly performance on record, yet a gain at the margin suggests the worst of the slump is behind for the Chilean economy. The monthly GDP proxy (IMACEC) shrunk 12.4% yoy in June (15.3% fall in May), leading to a 14% drop in 2Q20 (+0.4% in 1Q20). The activity contraction in June was milder than our 14.5% call (Bloomberg market consensus: -15.0%). Mining production continued to be mostly unaffected by the quarantine, posting growth of 2.2% yoy in June (1.2% previously). Meanwhile, non-mining activity shrunk 14.0% yoy in the month (17.0% drop in May) as mobility restrictions, a loosening labor market and low confidence resulted in a significant drag from services and construction, and, to a milder extent, commerce and manufacturing. Nevertheless, the economy stopped falling at the margin for the first time since February, rising 1.7% from May, indicating that the expected gradual recovery process anticipated for 2H20 is underway.
While there are signs that non-mining activity is beyond the worst, the pull from mining may moderate further in coming months as stricter operating conditions took hold following health scares in the sector. In the second quarter of the year, non-mining activity dragged GDP down (-14.0% yoy) with a 15.5% contraction (-0.1% in 1Q20). Mining activity growth was a milder 1.1% (5.1% in 1Q20).

Activity from the first quarter of the year to 2Q20 contracted 43.0% (annualized), the sharpest decline on record (+12.6% qoq/saar in 1Q20).  Non-mining sectors shrunk 46.7% qoq/saar (+12.7% in 1Q20), while mining activity slowed to 2.2% qoq/saar (11.4% in 1Q20).

As the largest urban area of the country partially opened up towards the end of July and the evolution of the coronavirus consolidates a favorable trend, the activity recovery is expected to continue ahead. Although consumer confidence remains near historic lows (at 21.2 points in July), the recent approval of the 10% pension withdrawal bill and a USD 625 middle-class income transfer (approved late last week) could offer some respite. Meanwhile, business confidence, excluding the volatile mining component, sits at 34.9 points in July (50 = neutral), above the lows reached in April (25.1 points) as commerce pessimism moderates. As a share of pension withdrawals (potentially as high as USD 18 billion) is directed to consumption, activity would receive a significant boost that could result in a milder GDP decline than the 7% we currently estimate. Going forward, there remains significant uncertainty, partly coming from the constitutional reform plebiscite in October that would continue to hamper investment decision-making and contain a more meaningful recovery ahead. The national accounts data for 2Q20 will be released on August 18.

Miguel Ricaurte
Vittorio Peretti

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