Itaú BBA - CHILE – Historic domestic demand slump in 2Q20

Macro Latam

< Back

CHILE – Historic domestic demand slump in 2Q20

August 18, 2020

Activity is likely to gradually recovery ahead as the economy reopens and the fiscal stimulus reaches firms and consumers

Activity expectedly collapsed in the second quarter of the year as sanitary measures to contain the pandemic hampered mobility and increased uncertainty. During 2Q20, GDP contracted 14.1% yoy, slumping from the 0.2% increase in 1Q20 (revised from 0.4%), broadly in line with market expectations obtained from the monthly GDP proxy series. Consumption of services fell by one quarter while durable goods dropped by a third, and a halt to construction pulled gross fixed investment down by 15.1%. Meanwhile a contained export drop (amid still growing mining shipments), along with diminished import demand helped limit the GDP decline. While the bulk of the shock can be attributed to supply-side factors, the deterioration of the labor market, failing firms and domestic uncertainty would change the nature of the shock and could hamper the expected recovery ahead.

Falling service consumption led a domestic demand plummet in the quarter. Total private consumption declined 22.4% yoy (2.1% fall in 1Q20), pulled down by services (-25.0%) and falling non-durable goods sales (declining 16.7%), while durable goods were also weak (33.6% down). Despite a significant fiscal package announced in response to the crisis, public consumption shrunk 11.5% yoy, dropping for the third consecutive quarter. Fixed investment fell for the first time since 3Q17, declining 15.1% yoy (+0.5% in 1Q20). A three-year public investment program (USD 34 billion) could support some recovery ahead. There was also a diminishing of inventories, in line with continued supply-side disruption. Overall, domestic demand contracted 19.1% (-2.8% previously). A collapse in services exported (-36.5% YoY) led to a mild 2.8% decline of exports of goods and services (+1.0% in 1Q20), while mining exports remained upbeat (+4.2% vs. 6.9% in 1Q29). Imports contracted a deeper 21.4% (9.4% fall in 1Q20). As a result, net-exports contributed with 5.1pp to growth (exceeding the 3.0pp contribution in 1Q20). On the supply-side, activity in the quarter was pulled down by personal services (falling 27.9% YoY; -4pp contribution), as well as commerce (20.6% drop), transportation (falling 34.4%), construction (-20.4%) and restaurants and hotels (-52.8%), four sectors which together subtracted 6pp from the headline growth print.

At the margin, activity fell 43.3% from 1Q20 (annualized), deteriorating from the 12% rise in 1Q20 (when the economy was recovering from the social unrest in 4Q19). Private consumption slumped 59.8% qoq/saar (+11.5% in 1Q20), while still elevated uncertainty led to a second consecutive quarter of an investment decline (43.6% qoq/saar vs. 10.9% drop in 1Q20). Public spending also fell (33.2% qoq/saar).

We anticipate a GDP contraction of 5.5% this year, with the recovery in 2H20 boosted by the expectation that a share of pension withdrawals (potentially as high as USD 18 billion) is directed to consumption. Activity is likely to gradually recovery ahead as the economy reopens and the fiscal stimulus reaches firms and consumers. In fact, during the month of June, activity posted the first monthly gain since the onset of the pandemic ion March. Direct cash transfers to the middle class are a tailwind, too. Nevertheless, we note that significant uncertainty remains, dragging investment, coming partly from the constitutional-reform plebiscite in October and exacerbated by the approval of the pension bill.

Miguel Ricaurte
Vittorio Peretti 

< Back