Itaú BBA - CHILE – Worst activity performance since global financial crisis

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CHILE – Worst activity performance since global financial crisis

Dezembro 2, 2019

Despite falling activity, FX volatility will get in the way of rate cuts this month.

The activity contraction in October, as protest action took hold, far exceeded market expectations. The GDP proxy (Imacec) shrunk 3.4% yoy (Itaú and Bloomberg consensus: 0.5% drop; +3.0% in September), with the seasonally-adjusted number contracting 5.4% from September, sharper than the 4.1% drop in March 2010 when the economy was struck by a major earthquake. Mining activity growth of 2.0% yoy contained the overall decline. Meanwhile, the non-mining component, which was more directly affected by the protest action, contracted 4.0% yoy. Protest action persisted in November, but partial normalization of activity operations likely mean a milder year-over-year activity contraction.

In the rolling-quarter ending in October, activity growth slowed to 1.0% yoy (3.3% in 3Q19), the weakest since 2Q17, despite the gradual mining recovery. Mining production grew 1.8% yoy (1.4% in 3Q19), but growth of the non-mining component reached 0.9% yoy (3.6% in 2Q19 and 2.1% in 2Q19).

At the margin, activity contracted for a second consecutive month, leading to a decline of 3.9% qoq/saar. Non-mining activity fell 4.7% qoq/saar in the quarter (2.3% in 3Q19), while mining momentum moderated to 4.2% qoq/saar (6.0% in 3Q19).

Given the large downside surprise to October activity and considering that disruptions persisted in November, activity for 2019 is likely to grow significantly lower than our prior call of 2.0% call (and the updated Finance Ministry range of 1.8%-2.2%), with a rate below 1.5% highly likely. The weak carry-over into 2020 along with historically low business confidence (that would likely translate into reduced investment decision-making), means the likelihood of an activity recovery next year is slim. The central bank faces a challenging scenario, considering the economy needs stimulus beyond that currently in place, but exchange-rate volatility stands in the way of further rate cuts. While we expect the central bank to stay on-hold this week, further easing next year is likely. 

Miguel Ricaurte
Vittorio Peretti

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