Itaú BBA - CHILE – Manufacturing surprises to the upside in January

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CHILE – Manufacturing surprises to the upside in January

February 28, 2019

Recovering sentiment and improving copper prices point to favorable activity dynamics in the short term

Manufacturing started 2019 on a better than expected footing. Yet, industrial production (aggregating mining, manufacturing and utilities) decreased 0.8% yoy in the first month of this year (+1.6% in December), dragged down by mining. Manufacturing grew 2.7% in January, far above our 0.3% forecast (also the Bloomberg median expectation), as growth in December was sharply revised from 0.8% to 2.7%. Still dynamic manufacturing of machinery and equipment (36.3% yoy, 0.9pp contribution) consolidates the expectation of robust investment. A higher base of comparison, reduced mineral treatment, and lower ore-grade at some key mining plants, along with iron production shrinking 43.1%, led to total mining production contracting 4.8% (+0.8% previously). This is the weak est performance since August last year, contributing a negative 2.1pp to industrial production growth. Meanwhile, utility growth remains weak, with production flat from one year ago as electricity production declines. We expect Imacec (monthly GDP proxy) to grow between 2.5%-3.0% in January (in line with the last print of 2018), led by non-mining activity. Going forward, growth may be adversely affected by harsh weather in February, which resulted in mining operations interruptions, consolidating the view of a weaker 1Q19 (relative to the end of last year).

In the quarter ending in January, activity moderated but remains better compared with 3Q18. Industrial production grew 0.6% yoy in the quarter versus the 1.6% rise in 4Q18, but up from the 1.5% drop in 3Q18. Mining growth was stable at 0.6% compared to 4Q18, but an increase from the 3.0% decline in 3Q18. Meanwhile, manufacturing rose 0.7%, down from 2.8% in 4Q18 (-0.4% in 3Q18). Utilities grew 0.5% after a 0.7% rise in 4Q18 and the 0.1% decline in 3Q18.

At the margin, manufacturing and mining supported growth. Industrial production increased 3.5% qoq/saar (+3.5% in 4Q18 and -5.3% in 3Q18), lifted by the mining production acceleration to 13.3% qoq/saar (+12.6% in 4Q18 and -2.7% in 3Q18). Nevertheless, with two consecutive monthly declines and unfavorable weather affecting activity in February, mining growth is set to slow noticeably. Manufacturing grew 3.5% qoq/saar (+5.2% in 4Q18 and -7.8% in 3Q18). Meanwhile, utility growth fell 1.2% qoq/saar (-5.4% in 4Q18 and -2.4% in 3Q18).

Recovering sentiment and improving copper prices point to favorable activity dynamics in the short term. Robust imports of capital goods, upbeat manufacturing of machinery and equipment as well as positive credit results favor an investment-led consolidation of the recovery. However, as uncertainty regarding inflation dynamics and still elevated external risks support a more cautious central bank, the likelihood of further rate hikes during the remainder of the first semester is low.

 

Miguel Ricaurte
Vittorio Peretti



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