Itaú BBA - CHILE – Manufacturing hampers activity in June

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CHILE – Manufacturing hampers activity in June

julio 31, 2019

Poor manufacturing points to weak consumption and investment, in line with our 2,4% growth forecast for the year.

Manufacturing plunged in the final month of 2Q19. The 5.4% manufacturing drop (+2.2% in May) was sharper than the Bloomberg market consensus of 2.1% and our call of a 2.5% decline. An unfavorable calendar effect partly explain the weakness. Yet, even after adjusting for such factor, manufacturing contracted 2.5%, the sharpest decline since March 2017. Meanwhile, mining was flat over twelve months, improving from the 2% drop in May, despite an extensive labor strike at an important mine. Utilities contracted for a second consecutive month as electricity generation falters amid less demand from manufacturing and commercial centers. Overall, industrial production (aggregating mining, manufacturing and utilities) fell 2.9% yoy in the month of June (0% in May), resulting in a 0.8% drop in 2Q19 (-1.7% in 1Q19). The weak industrial production data along with our expectation of soft retail activity in the month points to growth between 1.8% and 2% for the GDP proxy in June (2.3% in May), leading to a gain of around 2.1% in 2Q19 (1.6% the previous quarter). 

Shrinking manufacturing of food and beverages in 2Q19 point to weakening consumption, while slowing growth of machinery and equipment manufacturing is consistent with an investment slowdown. Manufacturing contracted 1.5% yoy in 2Q19 (+1.6% in 1Q19), the weakest print since 2Q17. Manufacturing of machinery and equipment slowed to 3.2% yoy in the quarter (with 1.8% drop in the month of June), from 25.2% in 1Q19 and 15.6% in 4Q18. Meanwhile, food processing shrunk 4.5% in the quarter (+0.3% in 1Q19). Mining rose a mild 0.2% (-5.9% in 1Q18), as it gradually recovered from unfavorable weather effects in 1Q19.

At the margin, activity gained momentum in 2Q19 following the notably sluggish evolvement in 1Q19. Industrial production accelerated to 4.7% qoq/saar (following a 5.9% contraction in 1Q19; +3.5% in 4Q18), boosted by mining and manufacturing improvement. Mining increased 15.2% qoq/saar (-20.2% in 1Q19), while manufacturing rose 5.2% qoq/saar (-1.0% in 1Q19). The momentum gain was partly countered by utilities falling 4.0% qoq/saar (+6.8% in 1Q19).

With confidence indicators remaining downbeat, the labor market sluggish and imports of consumer and capital goods slowing, we continue to see below potential growth ahead (averaging close to 3% in 2H19). We expect growth of 2.4% for 2019, down for 4% last year. Given weak growth, core inflationary pressures are set to stay low, providing room for the implementation of additional monetary stimulus by the central bank (we forecast yearend policy rate at 2.0%).

Miguel Ricaurte
Vittorio Peretti

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