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Quarterly sequential activity dynamics weakened in 2Q.
2023/07/31 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

Retail and manufacturing fell sequentially from May to June, resulting in larger than expectation annual contractions, while volatile mining rebounded at the margin. Real retail sales (including vehicles) fell 2.2% MoM/SA as the adjustment in private consumption continues. In annual terms, retail sales dropped 13.0% YoY (deeper than the Bloomberg market consensus of -10.1% and our -10% call; 10.6% drop in May). Retail activity was dragged by vehicles, electronics, and apparel. Manufacturing fell 0.3% MoM/SA leading to a 5.2% YoY fall (1.4% down in May), sharper than the Bloomberg market consensus (-3.1%) and our -4% forecast. Manufacturing was pulled down by food processing. After a large sequential drop in May, mining rebounded in June with a sequential rise of 7.1% MoM/SA, leading to an annual contraction of 0.4% YoY (9.2% drop in May). As a result, industrial production (grouping manufacturing, mining and utilities) rose 2.9% MoM/SA, leading to a 2.7% YoY fall (4.6% drop in May). While manufacturing and retail were weak, the large mining sequential rebound means the monthly GDP proxy will likely contract 1.2% YoY (August 01 release; 2.0% YoY fall in May).


Activity indicators contracted significantly in the second quarter. Durable retail sales fell 17% YoY (6.3% decline in 1Q23), while non-durables dropped 9.6% YoY (10.1% fall in 1Q23). Total retail sales fell 11.4% during the quarter (9.1% drop in 1Q23). On the industrial production front, weak manufacturing (down 3.1% YoY; -2.3% in 1Q) and still falling mining (2.6% drop) led to 3.1% YoY total industrial production drop (2.3% down in 1Q23).


Quarterly sequential activity dynamics weakened in 2Q. Manufacturing dropped 7.1% qoq/saar (following a transitory 7.9% boost in 1Q23), while the pace of the mining fall eased to 2.3% qoq/saar (11.5% drop in 1Q23), leading to a 4% qoq/saar contraction for overall industrial production in 2Q23. On the other hand, retail sales contracted 8.1% qoq/saar, deeper than the previous drop (-5.6% in 1Q).


Fundamentals point to weak activity ahead. In the short-term, we expect activity to remain weak, with sequential contractions penciled in for 2Q and 3Q. We foresee an improvement in activity towards yearend, driven by lower interest rates, falling inflation, and improvements in consumer sentiment and business confidence. We expect a GDP contraction of 0.4% this year (2.4% last year).