Itaú BBA - CHILE – Activity improvement continued in September

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CHILE – Activity improvement continued in September

November 3, 2020

GDP sits around 7% below the level prior to the pandemic, recovering from the cycle low of -16.2% in May

The activity recovery advanced in September, driven by commerce, manufacturing and to a lesser extent, business services. The GDP proxy, IMACEC, contracted 5.3% YoY in September, milder than the 11.3% drop in August and the first single-digit drop since March. The decline was less than both the market and our expectation (6.5% and 6.0%, respectively). Adjusted for seasonal and calendar effects, the annual decline was somewhat larger at 6.5% (11.5% previously). Mining production retreated 1.9% YoY (3.4% YoY down in August). Meanwhile, non-mining activity shrunk 5.7% YoY in the month (12.2% fall in August), with the key drags being construction, transport, education and hospitality services. Overall, GDP sits around 7% below the level prior to the pandemic (recovering from the cycle low of -16.2% in May). As the reopening of the economy consolidates, the drag from services (particularly in the hospitality industry) will likely diminish, while encouraging signs of job gains and sentiment improvement will also support the recovery process. 

While activity still shrunk by a significant 9.2% in 3Q20, the worst of the pandemic is behind the Chilean economy (14.1% drop in 2Q20). Mining activity fell by 1.3% yoy in the quarter (+1.6% in 2Q20), while the non-mining drag moderated to a 10.0% contraction (-15.7% in 2Q20).

At the margin, activity rose 5.1% from August, the largest monthly gain since the effect of the pandemic moderated and the fourth consecutive monthly increase. For the quarter, non-mining sectors rose 24.1% qoq/saar, partially recovering from the 47.0% drop in 2Q20. Meanwhile, previously upbeat mining dynamism eased to a 2.3% qoq/saar decline (+3.0% in 2Q20), amid labor strikes and increased health restrictions at the start of the quarter. Going forward, copper prices near USD 3.0 per pound would likely translate into a production improvement. Overall, total activity increased 21.0% qoq/saar in 3Q20, compared to the 43.3% contraction in 2Q20.

With the reopening of the economy consolidating in October, and copper prices remaining elevated, business sentiment improvement persisted. Business confidence, excluding the volatile mining component, sat at 49.8 points in October (50 = neutral), above the lows reached in April (25.1 points) and the least pessimistic since April 2019. Including mining, business sentiment moved into optimistic territory (at 51.7 points) for the first time since October last year when social unrest unfolded. Meanwhile, consumer sentiment is also improving, but more modestly. The GfK consumer confidence index came in at a still pessimistic 29.9 points in October, 6.8 points lower than one year ago, but the least downbeat since February. The improvement at the margin was led by the evaluation for purchasing household goods, likely reflecting cash transfers to consumers, and the 5-year expectation (likely influenced by the constitutional plebiscite that saw a large majority favoring a rewrite).

We expect a GDP decline of 5.5% this year (+1.1% in 2019), with a rebound of 5.5% next year. Significant monetary and fiscal stimuli, along with various business support measures, improved sentiment and individual liquidity injections would consolidate the recovery ahead. Additionally, the growing likelihood that a second pension withdrawal proceeds means that the consumption dynamism would persist next year. Possible headwinds to the economic recovery come from the onset of a second wave of the coronavirus that would merit the return of stringent containment measures (as unfolding in Europe), along with restrained investment dynamism amid uncertainty during the constitution rewriting period. The 3Q20 national account data will be published on November 18. Looking ahead to 4Q20, the recovery momentum, along with the low base of comparison (given the social unrest last year) would likely lead to positive annual growth prints for the first time since February.

Miguel Ricaurte
Vittorio Peretti

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