Itaú BBA - CHILE – Services drag activity down in October

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CHILE – Services drag activity down in October

December 1, 2020

Despite signs of a recovery, GDP remains well below pre-pandemic levels.

The activity recovery slowed in October as services fell at the margin for the first time since July, indicating that despite the reopening of the economy and liquidity injections, the economic recovery will be gradual. The GDP proxy, IMACEC, contracted 1.2% YoY in October, milder than the 4.8% drop in September, but well below both the market (+0.6%) and our (+0.5%) expectations. The IMACEC breakdown shows that commerce (+17.0% YoY) and manufacturing (+4.9%) are driving the activity recovery, while after two months of declines, mining returned to growth of 1.6%. On the other hand, services shrunk 4.9% (-8.2% previously), pulled down by restaurants, hotels, transportation and education. Adjusted for seasonal and calendar effects, IMACEC fell 0.5% from September, dragged by the 3.3% services decline. Overall, GDP sits almost 7.5% below the level prior to the pandemic (16% down during the cycle trough in May). With international borders being reopened in November and greater liberalization of inter-regional travel, an improvement in services going forward is likely, while surging business sentiment and signs of job recovery would support the economy.

The activity drag moderated during the quarter ending in October, with IMACEC shrinking 5.8% YoY, compared to the 9.1% drop in 3Q20 and 14.5% fall in 2Q20. Commerce rose 8.9% YoY (0% in 3Q20 and -20.8% in 2Q20). Meanwhile, mining activity fell by 1.2% in the quarter (+1.5% in 2Q20), and the services drag gradually eased to a 9.3% contraction (11.7% in 3Q20 and 16.2% drop in 2Q20).

At the margin, activity dipped for the first time since May. While commerce increased 0.9% MoM, it was far milder than the double-digit gains in prior months as the transitory boost from the partial pension withdrawal faded. Mining was broadly flat from September (-0.1%), while services shrunk 3.3% MoM. For the quarter, activity increased 38.4% qoq/saar, building on the 22.3% gain in 3Q (43.9% fall in 2Q20), as non-mining sectors rose 45.3% qoq/saar, partially recovering from the 47.7% drop in 2Q20. 

The consolidation of the economic reopening and positive developments on the health front regarding vaccine developments have led to a surge in business sentiment, while consumers remain circumspect. Business confidence, excluding the volatile mining component, moved to 52.6 points in November (50 = neutral), above the lows reached in April (25.1 points) and the least pessimistic since June 2018 amid widespread gains in the commerce, manufacturing and construction sub-indexes. Including mining, business sentiment moved further into optimistic territory (at 54.2 points). Meanwhile, despite partial job recovery and significant liquidity injections, consumer sentiment is more sticky at a low level. The GfK consumer confidence index came in at 29.5 points in November, improving from last year’s social unrest lows but ticking down 0.4pp from October.

Economic activity in Chile is expected to advance in coming months due to the benefits from significant monetary and fiscal stimuli, various business-support measures, individual liquidity injections (through transfers and pension withdrawals), and a more benign external environment (including high copper prices). Additionally, the likelihood that a second pension withdrawal proceeds means consumption dynamism would persist early next year. Nevertheless, the surprise in October puts a downside bias to our call of a 5.5% GDP contraction for this year.

Miguel Ricaurte
Vittorio Peretti


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