Itaú BBA - CHILE - Weak activity start to 2019

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CHILE - Weak activity start to 2019

mayo 20, 2019

Depressed private sentiment and a slowing global economy mean Chile’s growth risks are tilted to the downside

Following the activity rebound in 4Q18 (3.6% yoy), GDP grew less than expected in 1Q19 at 1.6%. The reading, which was the lowest since 2Q17, was below the 1.8% expansion implied from the monthly GDP proxy (IMACEC). Mining along with other volatile primary sectors dragged activity down in the quarter. Meanwhile, on the demand side, total consumption was broadly stable, but slowing investment and a more negative net export contribution hampered growth. With the consolidation of the activity recovery faltering, and inflation under control, the central bank is likely to retain current levels of monetary stimulus for a prolonged period.

Weaker investment is concerning as the growth outlook for the year depends on its robust performance. The slowdown to 2.9% yoy in 1Q19 (5.6% in 4Q18 and 4.7% in 2018), was explained by machinery and equipment component growing at the lowest pace in one year. Meanwhile, the construction component remained upbeat and the central bank has highlighted the upside revision to the basket of private investment projects reported by the Corporation of Capital Assets as evidence of a favorable outlook. There was no relevant inventory accumulation in the quarter. Overall, domestic demand growth slowed to 2.8% (from 4.5%), as investment and net exports deteriorated. Private consumption grew 3.2% (3.6% in 4Q18) as weaker durable good consumption offset robust services. Public consumption growth ticked up to a still low 1.7% (2.2% in 2018) as the fiscal consolidation program remains underway. Exports of goods and services shrunk for the first time since 2Q17, while import growth also slowed (to 2.3% from 6.6% in 4Q18), so the net-export drag to activity increased (-1.1pp contribution vs. -0.7pp previously). Weaker imports reflect the fragility of the domestic demand recovery, while shrinking exports highlight the more complex global environment.

Mining remains a key drag to activity along with other primary sectors. Mining contracted 3.6% yoy in 1Q19 (+1.3% in 4Q18), while fishing (-3.1% yoy) and agriculture (-1.2% yoy) also contributed to the weakness in primary activity. Primary sectors are typically volatile, so some unwind of negative shocks is likely as the year unfolds. Beyond the primary sector, manufacturing also weakened (0.9% yoy). Boosting activity in the quarter was the still robust financial services (4.0%) and construction (2.8%), while commerce moderated its pull (to 2.3% from 3.8%). Overall, excluding the primary sectors, GDP growth posted a milder slowdown to 2.7% from 3.6% in 4Q18.

At the margin, activity was the weakest since 1Q17, dragged down by decelerating investment and exports. Activity dropped 0.1% qoq/saar, after the notable rebound in 4Q18 (5.3% qoq/saar). On the positive note, private consumption dynamism improved (+3.5% qoq/saar vs. 2.6% in 4Q18), lifted by services. Public consumption also accelerated at the start of the year. On the other hand, a sharp contraction of machinery and equipment investment more than offset still robust construction investment. Overall, gross fixed investment fell 3.9% qoq/saar (+6.4% previously). Both exports and imports declined at the margin, but the drag from exports was supreme.

After a weak start to the year, depressed private sentiment and a slowing global economy mean risks to Chile’s growth outlook are tilted to the downside. We see growth of 3.0% for this year, down from 4.0% last year. Activity would be aided by an environment of low inflation, expansionary monetary policy and signs of some labor market recovery, along with a possible improvement of primary sectors.


Miguel Ricaurte
Vittorio Peretti

 

 



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