Itaú BBA - CHILE – Sharp activity decline in March

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CHILE – Sharp activity decline in March

Maio 4, 2020

Economic data is only starting to reflect the impact of the shock, with activity set to get worse before it gets better.

Activity plummeted in March, as the first impacts of the coronavirus shock infiltrate the economy. The monthly GDP proxy contracted 3.5% yoy, below our 1.0% call but in line with the Bloomberg market consensus. Mining posted a mild 0.8% rise, the slowest gain this year (10.4% in February), as this activity has been less affected by social distancing measures. Meanwhile, non-mining activity contracted 4.0% yoy (+2.0% in February), dragged by commerce and services (the latter hampered by education, transport, restaurants and hotels). With the coronavirus advancing in April, social distancing measures consolidated and public sentiment plunged, suggesting significant activity contractions will persist ahead. In this context, both monetary and fiscal authorities would stay ready to upscale measures if the economic distress escalates.

Despite the favorable start to the year, the coronavirus mitigating measures in March hindered activity significantly in 1Q20 and led to a consecutive annual contraction. The GDP proxy posted a 0.1% yoy drop, following the 2.1% drop in social unrest hit 4Q19. Mining activity was least affected by lockdown measures and led activity with growth of 4.1% yoy (2.0% drop in 4Q19), yet with global demand shrinking fast, mining dynamism is likely to fade ahead. Non-mining activity contracted 0.5% in the quarter (2.2% decline in 4Q19), reflecting poor domestic spending. 

Sequentially, activity improved somewhat from the close of last year, but March numbers and developments in April point to a bleak outlook.  Activity posted an 11.3% qoq/saar gain in the first quarter of the year, partially countering the 15.6% fall in 4Q19. Non-mining sectors expanded 11.7% qoq/saar (-15.4% in 4Q19), while mining activity improved (to 8.0% from -16.8% previously).Yet, with both mining and non-mining activity falling from February to March, the recovery will be short-lived and a double-digit decline in 2Q20 is anticipated. 

Economic data is only starting to reflect the impact of the shock, with activity set to get worse before it gets better. For April, business confidence fell by more than 20pp from last year to reach 31.7% (50 = neutral), the lowest on record. When the mining sub-index is excluded business sentiment drops further to 25.1%, below the previous trough of 31.4% at the close of last year amid the social unrest. Electricity generation declined 3.0% yoy in April (+0.6% in 2019) and unemployment insurance claims have spiked.

In this context the activity contraction this year in Chile is likely to exceed our -1.9% call. Although conditions are expected to gradually normalize in 2H20 and through 2021, the output gap will likely be wide.

Miguel Ricaurte
Vittorio Peretti

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