Itaú BBA - CHILE - Activity ends 2016 with a whimper

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CHILE - Activity ends 2016 with a whimper

Março 20, 2017

With the weak end to 2016 and an even feebler start to 2017 expected, prospects of a recovery are diminished.

At the close of 2016, economic activity grew at the slowest pace since the financial crisis. Activity in the final quarter of 2016 was dragged down by shrinking investment and declining exports. Meanwhile, private consumption remains the main contributor to activity growth, while the administration’s effort towards fiscal consolidation meant public consumption moderated significantly. At the margin, the economy contracted in 4Q16. Overall, activity in 2016 floundered with growth of only 1.6%, a slowdown from 2.3% in 2015 and the lowest growth since the 1.6% drop in 2009.

Upside data revisions to activity earlier in the year prevented even weaker growth in 2016. The 2013 rebased GDP expanded 0.5% year over year in 4Q16, broadly in line with the market expectations based on the monthly GDP proxy. Economic growth was revised up by 0.3 percentage points in 1Q16 (to 2.5%), favored by weaker imports, while consumption helped lift growth by 0.2 percentage points in 3Q16 (to 1.8%).

Gross fixed investment declined for the second consecutive quarter as private sentiment stays distressed and tax-incentivized construction boom concluded. Gross fixed investment fell 5.0% year over year, after a 2.4% decrease in 3Q16, as expenditure in machinery and equipment slowed to -5.2% (-3.1% in 3Q16), while the construction component contracted 4.9% (-2.0% previously). Total consumption expanded 2.3% (3.1% in 3Q16), dragged down by the public consumption slowdown (1.7% vs. 7.1% in 3Q16) on the back of a less expansionary fiscal policy. Meanwhile, the private consumption component was broadly stable at 2.4%. Within this component, durable goods remain robust, growing 5.5% in the quarter (4.9% previously). On the external front, copper exports (-9.3% from +0.4% in 3Q16), weakened service exports and declining sales of manufactured goods resulted in total exports falling 2.0% (+0.1% in 3Q16). Meanwhile, imports of goods and services were flat from 4Q15 (-2.0% previously), so net exports contributed negatively to growth. For the full year 2016, there was a 0.8% drop in gross fixed investment (the third consecutive year of contraction) and de-accumulation of inventories subtracted 0.9 percentage points from the year’s growth.

On the supply side, mining production was the main drag on activity in the quarter and the year. Mining production contracted 3.3%, down from -0.8% in 3Q16, while other natural resource sector (fishing and agriculture) showed improvement from the previous quarter. Manufacturing slowed to 2.2% (-0.8% previously), while utilities and business services also dragged activity down in the quarter. Supporting activity growth was commerce. In 2016, mining was the main drag on activity, shrinking 2.9% (0% in 2015).

At the margin the economy deteriorated. Sequentially, activity decreased 1.4% qoq/saar, from the +3.5% qoq/saar in 3Q16, due to lower fixed investment.

With the weak end to 2016 and an even feebler start to 2017 expected, prospects of a recovery are diminished. The continuing labor strike at the largest copper mine will affect activity in both February and March. Hence, in spite of higher copper prices, falling inflation and declining interest rates, the weak carry-over effect, supply side shocks and uncertainty ahead of the presidential elections will likely stand in the way of ameaningful recovery. We now see GDP growth of 1.8% this year, down from our previous forecast of 2.0%.


Miguel Ricaurte

Vittorio Peretti


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