Chile: Happy 2013 Beginning for Activity

Chile: Happy 2013 Beginning for Activity

Nader Nazmi - Market Economics
Latam Macro Snapshot | 28 Feb 2013 15:06 |

According to data releases today, the economy began the year on a strong note. In January, manufacturing output surprised to the upside, retail sales expanded rapidly and unemployment fell to a six-year low. The monthly proxy for real GDP (Imacec) due out next Tuesday is thus set to reflect rapid economic expansion in January. We project a 6.8% y/y rise in the Imacec in the first month of the year. Rapid growth supports our view that fiscal and monetary policies need to turn less accommodative to reduce the risk of overheating. Chile continues to exhibit strong growth

Manufacturing production expanded 0.7% m/m (sa) in January (Chart 1). The corresponding growth of 4.3% y/y exceeded the consensus projection of 3.0% y/y and even our more optimistic 3.6% y/y forecast. The main contribution to the annual gain came from the food industry (dairy products in particular), petrochemical production and metal output. On a 3-month moving average basis, manufacturing production growth slowed down to 0.7% y/y, reflecting the impact of a large 2.5% y/y contraction in December.

Separately, mining production rebounded from a 2.6% y/y contraction in December to expand by 8.4% y/y in January, owing to higher copper production (+8.6% y/y). Utility (electricity, gas and water) output increased 2.7% y/y helped by electricity generation and distribution. The overall industrial production index (comprised of manufacturing, mining and utility) expanded 6.1% y/y in January.

Retail sales increased 9.5% y/y in January, in line with our consensus-matching 9.8% y/y projection (Chart 2). Purchases of clothing and durable goods, especially autos, rose strongly and underpinned January’s rapid retail sales growth.

The strength of durable goods sales reflects consumer confidence rooted in improved labour market conditions. Indeed, the jobless rate declined to 6.0% in January, its lowest since end-year 2006.

Manufacturing, retail sales and employment data indicate that both production and demand sides began the year strongly. They also provide additional support for the view that the central bank will soon have to withdraw monetary stimulus and increase the policy rate.