Chile: Manufacturing is weakening, despite April bounce

Chile: Manufacturing is weakening, despite April bounce

Nader Nazmi - Market Economics
Latam Macro Snapshot | 30 May 2013 18:07 | 327 Kb

Manufacturing production expanded 3.4% y/y in April, in line with our 3.6% y/y call, and better than the consensus projection of 2.9% y/y. The main contribution to the annual gain came from increased production of processed food (+13.7% y/y). Despite the rebound, manufacturing growth in April is disappointing, especially given that this April had two more working days than April 2012.

On a three-month moving average basis, manufacturing production growth decelerated to 0.4% y/y (Chart 1). Manufacturing output in the 12-month period ending in April increased only 1.4%, the slowest growth pace since September 2010. Our seasonally adjusted data show a 2.7% m/m sa contraction in manufacturing output in April.

The overall industrial production index (comprised of manufacturing, mining and utility) expanded 1.5% y/y in April (Table 1, Chart 3). Mining production contracted 0.7% y/y in April, as copper output declined 1.2% y/y, due in part to labour strikes. Utility (electricity, gas and water) output increased 4.2% y/y, helped by electricity generation and distribution.

Retail sales remained strong, rising 11.2% y/y in April, following a 10.2% y/y gain in the prior month (Chart 2). Retail sales in the first four months of the year exceeded sales in the same period a year ago by 9.6%. The strength of retail sales, especially durable goods, reflects consumer confidence rooted in a record low unemployment rate.

While retail sales data reflect continued strong consumer demand, manufacturing and IP data show slowing production. Tightening credit conditions and a softening real estate market (building permits dropped 11.7% y/y in April, following a 23.4% y/y decline in March) will begin to partially offset the impact of a solid labour market and strong consumption sentiment, we believe. The deteriorating growth outlook in China and lower copper prices will likely slow the pace of investment in the mining sector and dampen demand. We believe conditions for rate cuts will gradually fall in place.