Itaú BBA - CHILE – Manufacturing improves, but mining drag returns in May

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CHILE – Manufacturing improves, but mining drag returns in May

junio 28, 2019

Weaker growth in machinery and equipment manufacturing hints at an investment slowdown.

Besides the underwhelming mining activity in May, a notable labor strike in June means the primary sector will remain a key drag to activity in 2Q19. Overall, industrial production (aggregating mining, manufacturing and utilities) fell 0.2% yoy in the month of May (+0.7% in April). Driving activity in the month was the 1.9% yoy increase of manufacturing (-1.5% in April), above the Bloomberg market consensus of 0.3% growth and our 1.0% call. After adjusting for calendar effects, the manufacturing rise was stronger, at 2.6% (-0.2% in April). Having posted a bounce back in April (after contracting in each month of 1Q19), mining production shrunk 2.0% yoy (+2.6% previously), explained by lower ore-grade and decreased mineral treatment at some key mines. Compounding the weakness in the month was the first decline in utility activity (-1.5% yoy) since September last year, as gas production faltered. Overall, the industrial production data along with our expectation of mild retail activity in the month suggests that the GDP proxy will continue to grow below potential at 2.3% in May, similar to April.

Weaker growth in the manufacturing of machinery and equipment hints at an investment slowdown. Despite manufacturing of machinery and equipment continuing to lift activity, growth slowed to 5.6% yoy in the first two months of 2Q19, from 25.2% in 1Q19 and 15.6% in 4Q18. Overall, in the quarter ending in May, manufacturing slowed to 0.6% year over year (1.6% in 1Q19 and 2.8% in 4Q18). Mining moderated its contraction in the quarter to 1.1% (-5.9% in 1Q18). Total industrial production fell 0.1% yoy in the quarter, still weak despite improving from the 1.7% drop in 1Q19.

At the margin, momentum was strong but after a very weak 1Q19. Industrial production accelerated to 6.3% qoq/saar (following a 5.7% contraction in 1Q19; +3.6% in 4Q18), boosted by mining activity and some manufacturing improvement. Nevertheless, going forward the extensive mining strike in June will curb the dynamism gains. Mining increased 8.4% qoq/saar in the quarter (-20.5% in 1Q19), while manufacturing ticked up to 1.4% qoq/saar (-0.8% in 1Q19). The momentum gain was partly countered by utility growth slowing to 3.3% qoq/saar (6.8% in 1Q19).  

With still-weak activity in 2Q19, depressed sentiment, a loose labor market, lower global growth and contained copper prices, odds of further monetary easing are high. We see growth of 2.4% this year, down from 4% for 2018, resulting in the output gap widening further and supporting our call for additional monetary stimulus (yearend rate at 2.0%).

Miguel Ricaurte
Vittorio Peretti

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