Itaú BBA - CHILE – Activity rebounded in 4Q18, led by investment

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CHILE – Activity rebounded in 4Q18, led by investment

March 18, 2019

Data in line with the central bank’s narrative

Following the slowdown recorded in 3Q18, activity accelerated at the close of 2018 to its fastest pace since 3Q17. In 4Q18, activity grew 3.6%, exceeding the 3.3% expansion implied form the monthly GDP proxy (IMACEC) and up from the 2.6% recorded in 3Q18 (revised down from 2.8%). For the 2018 full year, growth came in line with the widespread 4.0% expectation, while growth was revised down from 1.5% to 1.3% for 2017. Overall, the improvement in 4Q18 is broadly in line with the central bank’s view that the slowdown in 3Q18 was transitory. However, we believe that with the set of weaker activity indicators at the start of this year, along with short-term uncertainty over inflation dynamics and still elevated external risks, the central bank is likely to be cautious. We expect only one additional interest rate hike, to 3.25% in 2H19.

The investment recovery advanced in the final quarter of the year. Domestic demand growth was broadly stable in the quarter (4.5%), as investment improvement offset slowing consumption. Private consumption grew 3.6% (4.1% in 3Q18) as durable good consumption moderated to 4.8% yoy (7.1% previously) on the back of slowing automobile sales, while service spending growth stayed solid at 4.6% (4.9% in 3Q18). Public consumption growth slowed to its lowest pace since 4Q13 as the fiscal consolidation program takes grasp (1.3% vs. 1.9% in 3Q18). Gross fixed investment expanded 5.6% yoy (4.9% in 3Q18) as machinery and equipment growth picked up to double-digits (linked to mining), while construction posted its fourth consecutive quarter of growth (2.1%). Inventory accumulation also favored growth in the quarter. Excluding inventories, domestic demand posted milder growth of 3.7% versus 3.9% in 3Q18. Exports recovered from 3Q18 with growth of 3.3% (1.3% in 3Q18), while import growth slowed (to 6.6% from 8.0% in 3Q18), resulting in a smaller net-export drag to activity (-0.7pp contribution vs. -1.9pp previously).   

Mining remains a drag to activity, but improved from 3Q18. Mining grew 1.3% in 4Q18 following the 1.9% contraction in 3Q18 as copper production recovered. Meanwhile, financial services (6.0% versus 4.5% in 3Q18) and commerce (3.8% from 2.9% in the previous quarter) were some of the key growth drivers in the quarter, while manufacturing also improved (3.6% after 1.0% growth in 3Q18).

At the margin, activity accelerated to 5.3% qoq/saar after nearly stalling in 3Q18 (0.6% qoq/saar). The growth acceleration was led by domestic demand increasing 6.6% qoq/saar (from -2.1% in 3Q18). Gross fixed investment growth accelerated to 5.1% qoq/saar (3.1% in 3Q18), with improvements in both the construction division and in purchases of machinery and equipment. Meanwhile, private consumption ticked up to 3.2% qoq/saar (2.2% previously) and public consumption advanced a mild 1.6% qoq/saar (0% previously).

For 2018, growth came in line with expectations, but was favored by a lower base of comparison. The 4% GDP gain last year was lifted by the 4.7% rise in gross fixed investment, which still came in below expectations (5%-6%). Meanwhile, explaining part of the downward revision of growth to 1.3% in 2017 (from 1.5%) was the adjustment to the investment performance, with a larger decline of 2.7% (-1.1% initially). Private consumption rose 4% last year, building on from the upwardly revised 3.0% in 2017 (2.4% initially). Revisions to activity were also made to 2016 (up to 1.7% from 1.3%) resulting in an additional 0.3pp GDP growth accumulated during 2014-2018. This means that the output gap not only likely narrowed in the final quarter of 2018 but was also smaller in the recent past, consolidating the central bank’s view during last year that less monetary stimulus was required.

We see GDP growth moderating to 3.2% this year. The recovery of copper prices will likely support business confidence and lead to still vigorous investment throughout the year, while low inflation and an expansionary monetary policy foster a favorable environment for consumption.

Miguel Ricaurte
Vittorio Peretti


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