Itaú BBA - CHILE – Investment recovery lifts 2Q19 activity, but to a still-weak pace

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CHILE – Investment recovery lifts 2Q19 activity, but to a still-weak pace

agosto 19, 2019

External headwinds will limit the pace of recovery ahead

In line with the outcome from the monthly proxy series (Imacec), GDP grew 1.9% yoy in 2Q19 and 1.8% in 1H19. Activity in the second quarter of 2019 highlighted slowing consumption, an import slump that meant net exports was no longer a drag, while investment gained momentum. On the supply-side, a natural resource-sectors (mainly fishing and mining) and a construction recovery boosted activity, while manufacturing and commerce weakened. Overall, the economy continues to grow at a weak pace, hinting that demand-side inflationary pressures are low and strengthens the expectation that central bank will see a looser monetary policy as necessary to ensure inflation converges to the 3% target. We expect a 25-bp rate cut to 2.25% next month. 

Investment bounced back in 2Q19, boosted by the construction component. Gross fixed investment increased 4.8% yoy in 2Q19 (from a upwardly revised 3.2% in 1Q19 and 4.7% in 2018), with construction growing 6.4% (2.8% in 1Q19), the highest gain since 3Q13. The construction investment was linked to mining and transportation works. On the other hand, and despite accelerating sharply at the margin, the machinery and equipment division dragged investment down in the quarter (2.0% yoy from 3.9% in 1Q19). Private consumption slowed to 2.3% (3.0% in 1Q19) as durable good consumption shrunk at the sharpest rate since early 2015, while public consumption growth ticked down to 2.2% (2.6% in 1Q19). Exports of goods and services shrunk for the second consecutive quarter (-3.2% in 2Q19 versus a downwardly revised -2.0% in 1Q19), hindered by larger declines in mining and manufacturing exports. Meanwhile, imports contracted for the first time since 1Q17 (-3.5% versus +1.4% in 1Q19). As a result, the net exports contribution was mildly positive (the first such case since 1Q18). Weaker imports reflect the fragility of the domestic demand recovery, while shrinking exports highlight the more complex global environment. Overall, final domestic demand moderated to 2.8% (the weakest since 3Q17). 

At the margin, activity recovered from a mild drop in 1Q19, comfortably averting a technical recession. Activity rose 3.4% qoq/saar (-0.01% qoq/saar in 1Q19), driven by machinery and equipment lifting gross fixed investment growth to 11.0% qoq/saar (-2.0% in 1Q19). Private consumption decelerated to 1.3% qoq/saar (3.7% in 1Q19). Public consumption also slowed in the second quarter of the year. Both exports and imports fell on a sequential basis.

Despite a more favorable base of comparison along with added monetary and fiscal stimulus measures, we anticipate external headwinds will limit the pace of recovery. We see growth at a below-potential 2.4% this year (slowing from 4% in 2018).
 

Miguel Ricaurte
Vittorio Peretti



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