Itaú BBA - CHILE – July activity confirms recovery is underway

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CHILE – July activity confirms recovery is underway

September 1, 2020

Improvements on the health front, along significant monetary and fiscal impulses, are contributing to the recovery.

For the fourth consecutive month, activity posted a double-digit annual contraction in July, yet the fall was the mildest since March and consecutive gains at the margin reinforce the view that the Chilean economy is in a recovery phase. The monthly GDP proxy (IMACEC) shrunk 10.7% yoy in July (14.1% fall in 2Q20), positively surprising both us (-13%) and the Bloomberg market consensus (-12%). Still rising mining production (+1.4% YoY), despite expectations that health incidents partially disrupted operations, was key behind the surprise. Meanwhile, non-mining activity shrunk 12.0% yoy in the month (14.5% drop in June; -15.7% in 2Q20) as sectors most affected by lockdown measures (services, construction, commerce and manufacturing) remain key drags. At the margin, both mining and non-mining activity recorded gains, but GDP remains around 14% below the level prior to the pandemic (recovering from the cycle low of -16.2% in May). With mobility restrictions easing from the backend of July, liquidity injections materializing (cash transfers and pension withdrawals) and private sentiment improving, the activity recovery is set to continue in forthcoming months.
Mining activity remained a key growth driver in the quarter ending in July, and with the health situation improving in Chile and global copper prices hovering around USD 3.0 per pound amid China’s recovery consolidating, production incentives are high. In the quarter, non-mining activity dragged GDP down with a 14.6% contraction (-13.0% yoy in July; -15.7% in 2Q20). On the other hand, mining activity expanded 1.8% (1.6% in 2Q20).

At the margin, activity rose 1.7% from June, building on the 0.8% gain previously as non-mining activity improves. For the quarter, non-mining sectors shrunk 35.8% qoq/saar, moderating from the 47% drop in 2Q20. Meanwhile, mining activity increased 2.5% qoq/saar (3.3% in 2Q20). Consequently, total activity slumped 32.6% qoq/saar, but less than the 43.3% contraction in 2Q20.

Significant monetary and fiscal impulses are contributing to the recovery, while a favorable trend on the health front is being translated into improved sentiment. Business confidence, excluding the volatile mining component, sat at 40.5 points in August (50 = neutral), above the lows reached in April (25.1 points) and the least pessimistic since October when social unrest unfolded. Despite the improvements, there remains significant uncertainty, partly coming from the constitutional reform referendum in October that would continue to hamper investment decision-making and contain a more meaningful recovery.
We expect a GDP decline of 5.5% this year (+1.1% in 2019), with a rebound of 5.5% next year, with the recent data improvement tilting risks to higher growth. The recent data, along with policy decisions will likely lead the central bank to moderate its expected GDP contraction for this year (currently between -7.5% and -5.5%) when it publishes its 3Q Inflation Report on Wednesday. Nevertheless, inflationary pressures remain contained amid a significant output gap and steady CLP, hinting at no meaningful adjustment to the forward guidance of stable rates at 0.5% for a prolonged period.

Miguel Ricaurte
Vittorio Peretti 

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