Itaú BBA - CHILE – Consumption leads activity recovery in 3Q20

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CHILE – Consumption leads activity recovery in 3Q20

November 18, 2020

Monetary and fiscal stimuli and individual liquidity injections would consolidate the recovery ahead.

GDP contracted a still significant 9.1% yoy in the third quarter of the year, but advancement at the margin amid the reopening of the economy and liquidity injections (such as transfers and partial pension withdrawals) reflect the recovery is underway. The 3Q20 print was broadly in line with market expectations, derived from the monthly GDP proxy. The 9.1% contraction was milder than the historic 14.5% decline registered in 2Q20 (revised from -14.1%) during the peak of the confinement measures. Activity increased 5.2% from 2Q, but after the prior 13.5% drop, the GDP level remains 9% below that of the first quarter. Dynamics in the quarter show consumption leading the recovery, boosted by a return to annual growth for durable goods. Gross fixed investment remains weak given still elevated uncertainty and softening exports amid gradually recovering imports led to a smaller boost from net-exports. The activity recovery is likely to consolidate during the final quarter of the year amid a reopened economy and significant stimuli.

The activity decline in 3Q20 was partly contained by a rebound of durable goods consumption (+24.3% yoy vs. 33.7% drop in 2Q20), as aforementioned liquidity injections and consolidating work-from-home conditions led to increased demand for technological goods, particularly computers and mobile phones. Total private consumption declined 8.8% yoy (22.2% fall in 2Q20), pulled down by services (-19.1%). Meanwhile, the fall of non-durable goods sales eased to 2.1% (16.2% drop previously). Despite a significant fiscal package announced in response to the crisis, public consumption shrunk 3.7% yoy, dropping for the fourth consecutive quarter, but milder than the 13.3% decline in 2Q20. Fixed investment fell for the second consecutive quarter and by roughly the same magnitude (18.5%). The milder investment drop in machinery and equipment during the quarter (-5.6% vs. 27.7% down in 2Q20) was offset by deeper declines in building – residential and non-residential – and lower investment in engineering work related to mining. Going forward, a significant public investment program would support a recovery of the latter. In fact, the quarterly survey by the Capital Goods Technology Development Corporation estimated an investment pipeline (public and private) of roughly USD 60.1 billion in the 2020-2024 period (approx. 20% of GDP), up 6% from the previous survey. There was also a diminishing of inventories for the sixth consecutive quarter, in line with continued supply-side disruption, uncertainty and improving consumption and investment. Overall, domestic demand contracted 11.4% (-20.6% previously). Net exports contributed with 2.4pp to growth (diminishing from the 6.3pp contribution in 2Q20). On the supply-side, activity in the quarter was mainly pulled down by personal services (falling 18.6% yoy; -2.5pp contribution), as well as construction (29.2% drop; -2.0pp contribution). Meanwhile, improving commerce and manufacturing activity helped contained the activity drop.

At the margin, activity rose 22.6% from 2Q20 (annualized), improving from the 43.9% drop in 2Q20.

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 and individual liquidity injections (through transfers and pension withdrawals) would consolidate the recovery ahead. Additionally, the growing likelihood that a second pension withdrawal proceeds means consumption dynamism would persist early next year. Possible headwinds to the economic recovery come from the onset of a second wave of the coronavirus before the widespread availability of a vaccine, that would merit the return of stringent containment measures (as are unfolding in Europe). Additionally, restrained investment dynamism could ensue amid uncertainty during the constitution-rewriting period.

Miguel Ricaurte
Vittorio Peretti 

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