CHILE – Upbeat June activity amid mixed labor market signals

Large stimuli and a favorable external environment will support a recovery consolidation during 2H21

Vittorio Peretti 


The activity recovery advanced in June, with retail sales and manufacturing posting sequential increases, while labor market data continues to show a sluggish employment recovery. With mobility restrictions during May and June at a similar level (around 50% of the population placed under the strictest measure), activity continued to recover from the April slump (when close to 90% of the population was in lockdown). Retail sales (including vehicles) increased 2.6% from May, leading to a 65.6% YoY rise (+72.1% previously), boosted by apparel (+13.6pp contribution), household electronics (+12.9pp) and new car sales (+11.7pp). The retail performance was broadly in line with market expectations (Bloomberg consensus and Itaú: 67%), consolidating the consumption-led recovery. Meanwhile, after three consecutive months of mild sequential declines, manufacturing rebounded with growth of 4.8% from May, leading to a 14.6% YoY rise (+8.8% previously), exceeding market expectations (Bloomberg market consensus: 9.8%; Itaú: 12%). Food and beverage manufacturing were key drivers as the economy reopens. Mining was flat from May to June, resulting in a 1.0% YoY contraction (down 1.4% previously), due to reduced ore-grade at a key copper plant. As a result, the industrial production index (aggregating manufacturing, mining and utilities) increased 6.0% YoY in June (+3.5% previously). The activity indicators point to the June Imacec increasing 16.5% YoY (+18.1% previously) and 16.2% in 2Q21 (0.3% in 1Q21). Meanwhile, the unemployment rate in 2Q21 came in below expectations at 9.5% (Bloomberg market consensus: 10%; Itaú: 9.8%), 2.7pp down from last year, but characterized by a sharper fall in the labor force at the margin, as opposed to a swift employment recovery.

During the second quarter of the year, retail sales continued to pull up activity. Industrial production increased 4.8% YoY, recovering from the 0.9% decline in 1Q21, as manufacturing rose 9.6% (0.2% drop in 1Q21), and mining increased 0.5% (1.6% down in 1Q21). Retail sales growth picked up to 60.9% YoY in the quarter, up from 10.7% in 1Q21 (17% in 4Q20). Durable sales remained the key driver with sales more than doubling in the quarter (up a third in 1Q21), while non-durable sales growth accelerated 39.9pp to 44.9% YoY. 

At the margin, retail sales momentum accelerated in the quarter to 54.6% qoq/saar (compared to a decline of 11.4% in 1Q21), while manufacturing increased a milder 1.2% qoq/saar (from +3.9% in 1Q21) and mining slowed to 2.8% qoq/saar (5.8% in 1Q21).

While the activity recovery is dynamic, mixed signals remain from the labor market. Although the unemployment rate in 2Q21 dropped 2.7pp over twelve months to 9.5%, the first single-digit print since April last year, labor force participation remains low (at 55.9% vs. 57.3% in 1Q21 and over 60% pre-pandemic). Including those inactive individuals that would potentially be part of the labor force under different conditions, the unemployment rate would be around 2pp higher. Employment is increasing at a double-digit pace from last year, favored by base effects. Yet, at the margin, employment (SA) shrunk 0.7% from 1Q21, while the labor force dropped by a larger 1.5%, hampered by the widespread mobility restrictions enforced at the start of 2Q21. Overall, there remains uncertainty generated by data over the labor market evolvement. For instance, while the national statistics agency’s survey shows formal salaried employment still lags pre-pandemic levels (see chart), administrative data such as the number of pension contributors indicates a full recovery. The lack of clarity on the labor market evolution has been cited by the central bank.

We expect a swift activity recovery in the short term, boosted by large stimuli, vaccination progress (80% of the adult population is fully vaccinated) and a favorable external environment, followed by a moderation next year as uncertainty over the direction of domestic policy is joined by weaker impulse from macro policies and copper prices. We expect GDP growth of 8.5% for this year (from a 5.8% fall in 2020) and 2.7% next year. With mobility restrictions significantly lifted in July and the reactivation of various services underway, the employment recovery is likely to resume in 2H21. Additionally, the drop of new Covid-19 cases and the reopening of schools would favor a labor force rebound, although the presence of the income transfer program for families (active through to September) could delay a return. We expect an average unemployment rate of 9.0% this year (10.8% last year).

Vittorio Peretti