Itaú BBA - CHILE – Still weak June activity points to 14.6% yoy GDP contraction in 2Q20

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CHILE – Still weak June activity points to 14.6% yoy GDP contraction in 2Q20

July 31, 2020

With some easing of lockdown measures unfolding, some gradual economic recovery is anticipated

Activity indicators continued to post significant declines in June, completing an historic slump in 2Q20, yet dynamics at the margin suggest that the worst of the adjustment is behind us. Industrial production, grouping manufacturing, mining and utilities, posted a milder decline (2.6% yoy vs. 5.9% in May) as mining activity remained upbeat (+2.7%) and manufacturing moderated its fall. Manufacturing declined 8.3% (13.7% drop previously), weaker than our -5% call (same as the Bloomberg market consensus). Meanwhile, retail sales contracted 24.0% yoy (28.7% drop previously; Itaú. -22.5%; Bloomberg consensus: 26.2%), as cash transfers likely contributed to a 5.5% month-over-month gain from May. Overall, the sectorial activity for June points to the GDP proxy (IMACEC) contracting 14.5% yoy (15.3% fall in May), resulting in similar decline in 2Q20 (+0.4% in 1Q20).

As expected, the economic contraction in 2Q20 was a historical record, dragged by durable consumption. Industrial production fell 4.2% yoy in 2Q20, deteriorating from the 2.5% increase in 1Q20. Manufacturing dropped 9.4% (+2.2% in 1Q20), dragged by food processing. Utilities shrunk 3.7% yoy (2.3% down in 1Q20). Meanwhile, mining rose 1.5% (4.3% in 1Q20). On the consumption front, retail sales (including vehicles) dropped 28.2% in the quarter (3.8% fall in 1Q20), as durable sales contracted 40.6% in the quarter (13.4% drop in 1Q20). Meanwhile, wholesales (a key activity driver for most of last year) dropped 12.8% in the quarter (+3.2% in 1Q20). As a result, the commercial activity index – aggregating wholesale and retail sales – fell 21.5% in 2Q20 (1.4% drop in 1Q20).

On a sequential basis, manufacturing posted the mildest drop (0.7% MoM) in the last five months, while retail activity built on the 4.3% gain in May with a 5.5% MoM increase. Nevertheless, in the quarter, manufacturing still fell 33.8% annualized (7.2% rise in 1Q20). Mining accelerated to 6.9% qoq/saar (-1.4% in 1Q20), as operations remained broadly unaffected by lockdowns measures (although this will not be sustained as some disruptions unfolded in July). Overall, the industrial production index decreased 15.6% qoq/saar (after rising 2.0% in 1Q20). Meanwhile, retail sales declined 67.6% qoq/saar (+11.5% in 1Q20).

As some easing of lockdown measures took place at the end of July, some gradual economic recovery is expected to unfold. Additionally, the 10% pension withdrawal program would likely support some increased consumption dynamism. Assuming that a part of those withdrawals (potentially as high as USD 18 billion) are directed to consumption, activity would receive a significant boost that could result in a milder GDP decline than the 7% we currently estimate (+1.1% in 2019). Going forward, there remains significant uncertainty, partly coming from the constitutional reform referendum in Oc tober that would continue to hamper investment decision-making and contain a more meaningful recovery ahead. The pension withdrawal bill approval will likely contribute to exacerbate this uncertainty.

Miguel Ricaurte
Vittorio Peretti


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