Itaú BBA - CHILE – Consumption drag continues in 1Q20, further deterioration expected ahead

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CHILE – Consumption drag continues in 1Q20, further deterioration expected ahead

May 18, 2020

Reduced global demand, mobility restrictions and lingering domestic uncertainties would lead to a 3.7% contraction this year

Shrinking consumption in 1Q20 contained a net-export led activity recovery. In the first quarter of the year, GDP increased 0.4% yoy, partially recovering from the 2.1% decline in the social unrest hit 4Q19. The activity gain came in above market expectations of a 0.1% drop (obtained from the monthly GDP proxy series). The surprise comes from upside revisions to both mining and non-mining components for the first two months of the year, while March dynamics were broadly unchanged. There was a sharp drop of durable goods consumption and a near double-digit fall of investment in machinery and equipment (a good lead indicator of overall investment dynamics ahead). While an export rebound aided activity in the quarter, reduced global demand would moderate its impetus. Meanwhile, a loosening labor market and unfavorable growth prospects would amplify the domestic demand drag ahead. 

Service and durable goods consumption remained weak in the quarter, while investment is slowing. Durable goods sales fell 12.6% yoy (13.9% fall in 4Q19) and the consumption of services shrunk 2.7% (2.8% drop previously), while non-durable goods sales increased 0.2% (down 2.8% in 4Q19). As a result, total private consumption declined 2.2% yoy in the quarter (3.8% fall in 4Q19). The contraction of public consumption was milder at 1.0% (7.4% decline previously). Fixed investment growth slowed to 0.4% (from 2.7% in 4Q19), the weakest performance since 3Q17. While inertia meant construction investment persisted with growth of 6.3%, the component more sensitive to current developments, investment in machinery and equipment, built on the 2.1% contraction in 4Q19 with a 9.6% fall (the sharpest since 2Q15). There was also a diminishing of inventory, in line with continued supply-side disruption. Overall, domestic demand contracted 2.6% (-3.3% previously). Exports of goods and services rose 1.4% (3.5% decline in 4Q19), on the back of recovering mining, while imports contracted a deeper 8.9% (7.5% fall in 4Q19). As a result, the net-export contribution increased to 3.0pp (1.1pp previously). On the supply-side, activity in the quarter was led by construction (5.3% yoy) and mining (5.1% yoy). Meanwhile, hospitality related activity, such as restaurants and hotels (down 6.5%) and transportation (falling 3.4%) were key drags.

At the margin, a partial recovery from 4Q19 was registered, but the onset of the coronavirus shock means a great activity fall in 2Q20 is underway. Activity increased 12.7% qoq/saar, nearly offsetting the 15.3% decline in the final quarter of 2019 that was hampered by widespread social unrest. Social distancing measures in 2Q20, a continued private sentiment worsening, and the expected loosening of the labor market point to a deep activity contraction in the quarter that would be around 2 to 3 times the shock witnessed in 4Q19.

The combination of reduced global demand, mobility restrictions and lingering domestic uncertainties lead us to estimate a 3.7% growth contraction this year (+1.1% in 2019). Gross fixed investment is expected to contract at near a double-digit rate (+4.2% last year). Under such circumstances, monetary and fiscal authorities’ will remain ready to augment their response in a bid to avoid the transitory shock leading to repercussions that are more permanent.

Miguel Ricaurte
Vittorio Peretti

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