Itaú BBA - CHILE – Activity recovery underwhelms in August

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CHILE – Activity recovery underwhelms in August

October 1, 2020

Services, construction, and manufacturing remained key drags, while commerce gains partly contained the decline.

Despite strong retail sales data in August, overall activity remained weak with the monthly GDP proxy shrinking by a double-digit annual rate for the fifth consecutive month. The IMACEC contracted 11.3% yoy in August, deeper than the 10.7% drop in July as mining production slumped. The decline was sharper than both the market and we were expecting (8.5% and 8.4%, respectively). Mining production shrunk 3.4% YoY (+1.4% YoY in July), the first annual drop recorded this year. Meanwhile, non-mining activity shrunk 12.2% yoy in the month, similar pace to July, as sectors most affected by lockdown measures (services, construction, and manufacturing) remained key drags, while commerce gains partly contained the decline. At the margin, non-mining activity posted the greatest gains since the onset of the pandemic (+3.4% MoM; 1.8% in July), but mining declined 1.9% MoM. Overall, GDP remains around 12% below the level prior to the pandemic (recovering from the cycle low of -16.2% in May). With mobility restrictions easing further during September, services reopening (particularly in the hospitality industry), liquidity injections consolidating (pension withdrawals) and private sentiment improving, the activity recovery will advance in coming months.
With copper prices around USD 3.0 per pound, production incentives are high and could mean the mining drag is transitory. In the quarter ending in August, the mining activity pull eased to 0.1% yoy (1.6% in 2Q20). On the other hand, the non-mining drag moderated to 12.9% contraction (-15.7% in 2Q20). Total activity was down 11.7% (14.1% drop in 2Q20).

At the margin, activity rose 2.8% from July, building on the 1.7% and 0.8% gains in the previous two months. For the quarter, non-mining sectors shrunk 9.5% qoq/saar, moderating from the 47.1% drop in 2Q20. Meanwhile, strong mining dynamism early in the quarter meant that activity still increased at a swift 3.5% qoq/saar (3.1% in 2Q20). Consequently, total activity declined a much milder 8.2% qoq/saar, compared to the 43.3% contraction in 2Q20.

The reopening of the economy amid a favorable health trend and elevated copper prices have led to a sentiment recovery. Business confidence, excluding the volatile mining component, sat at 46.6 points in September (50 = neutral), above the lows reached in April (25.1 points) and the least pessimistic since October 2019 when social unrest unfolded. Including mining, business sentiment is near neutral levels.
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. However, the upcoming constitutional reform referendum this month and the lengthy rewriting process ahead would nevertheless keep uncertainty high, something that risks hampering business sentiment (and investment decisions) ahead.

Miguel Ricaurte
Vittorio Peretti

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