Itaú BBA - CHILE – Milder-than-expected activity drop in July

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CHILE – Milder-than-expected activity drop in July

August 31, 2020

With the economy reopening, cash transfers and pension withdrawals materializing, the activity recovery advancing.

Activity indicators continued to post significant declines in July, but gains at the margin are in line with our expectation that a recovery is underway. Industrial production, grouping manufacturing, mining and utilities, declined 3.3% yoy (vs. 2.7% in June) as mining activity slowed (to +1.2% compared to a 2.4% average in May and June). Manufacturing moderated its fall to 7.2% (8.4% previously and 13.7% drop in May), better than our -12% call (Bloomberg market consensus: 10.5%). Meanwhile, retail sales contracted 17.4% yoy (24.2% drop previously; Itaú; Bloomberg consensus: -20%), with a third consecutive MoM increase. Overall, the sectorial activity for July points to the GDP proxy (IMACEC) contracting 13% yoy, broadly in line with the decline in June.

Consumption is recovering at a swift pace. Retail sales (including vehicles) dropped 23.6% yoy in the quarter ending in July (28.2% fall in 2Q20), as durable sales contracted a milder 33.2% in the quarter (40.6% drop in 2Q20). Meanwhile, wholesales (a key activity driver for most of last year) also posted a more contained drop of 8.7% (12.8% fall in 2Q20). As a result, the commercial activity index – aggregating wholesale and retail sales – fell 17.0% (21.5% decline in 2Q20, 1.4% drop in 1Q20). Meanwhile, in the quarter ending in July, manufacturing dropped 9.9% (9.5% fall in 2Q20). Utilities shrunk 2.8% yoy (3.7% down in 2Q20). Finally, mining rose 2.0% (1.5% in 2Q20). Overall, the consolidated industrial production posted a broadly stable decline of 4%.

On a sequential basis, the activity recovery is consolidating. Manufacturing increased for the first time since January, rising 2.9% from June, but it remains 10% below the pre-pandemic peak of January (-12.5% as of June). Meanwhile, retail activity built on the 4.1% gain in June with a 5.9% MoM increase. As a result, dynamics in the rolling-quarter show a milder decline. Retail sales declined 36.8% qoq/saar, compared to the 67% fall in 2Q20, while manufacturing fell 22% annualized (33.6% drop in 2Q20). Mining, on the contrary, slowed to 3.8% qoq/saar (5.8% in 2Q20), amid some operational disruptions in July. Overall, the industrial production index decreased 9.4% qoq/saar, moderating from the 15% decline in 2Q20.  

With the economy continuing to gradually reopen, cash transfers and pension withdrawals materializing, the activity recovery is likely to advance during the remaining 2H20. Such developments are likely internalized in the less downbeat consumer sentiment registered during August, rising to 25% (50 = neutral) after stabilizing near historic lows of 20% over the prior four months. Nevertheless, going forward 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, while the shock to the labor market would hinder the pace of the consumption improvement. We expect a GDP contraction of 5.5% (+1.1% last year), with a 5.5% rebound next year.

Miguel Ricaurte
Vittorio Peretti



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