Nader Nazmi - Market Economics
Latam Macro Snapshot | 20 May 2013 16:29 |
GDP growth came in 4.1% y/y in Q1, weaker than the consensus estimate of 4.5% and our own projection of 4.4%. On a quarterly basis, growth posted 0.50% q/q (sa) higher in Q1, in line with our 0.45 q/q call but weaker than 1.0% q/q consensus projection (Chart 1).
Sequential growth, which was the weakest since Q3 2011, was held back by a 5.2% q/q, sa (our adjustment), decline in public consumption. Private consumption advanced by only 0.6% q/q, sa, (our adjustment) in Q1, down from 1.9% q/q, sa, in Q4.
Domestic demand rose by 6.8% y/y, slowing from 8.2% y/y in Q4 due to weaker growth in both investment and consumption. Investment growth slowed to a 4-quarter low of 9.6% y/y from 18.1% y/y in Q4 and consumption growth dropped 1.8pp to 5.5% y/y. Public consumption growth was only 0.9% y/y, down from 7.2% y/y in Q4. Although private consumption growth decelerated from 7.3% y/y in Q4, it remained solid at 6.2% y/y in Q1. The contribution to growth from net exports was negative in Q2, as exports increased only 1.0% y/y, reflecting the weakness of external demand, while imports increased 8.2% y/y.
Is the policy rate too high?
The deceleration of growth in Q1 reflects weaker domestic and external demand as well as the fact that there were fewer working days in January-March this year than in Q1 2012. The calendar effect will reverse in Q2, supporting more rapid growth in April-June. However, growth this year is likely to slow to 4.5% from 5.6% in 2012 as domestic demand cools, we believe.
Private consumption remains buoyant on the back of a solid labour market and strong sentiment, but credit conditions are tightening and the real estate market is softening. Falling copper prices and rising production costs, due to higher energy and labour costs, will likely lower the pace of investment in the sector, dampening growth as a result.
As central banks around the world have eased, BCCh has been sidelined by above-trend growth and a widening current account deficit. These two constraints to rate cuts are becoming less binding. Indeed, today’s data also showed that the current account deficit narrowed to USD 1.7bn in Q1 from USD 2.9bn in Q4 and USD 4.9bn in Q3. At 3.7% of GDP, the 4-q current account deficit remains high but is likely to continue narrowing going forward. In addition, the current account deficit is not a source of concern given that it is easily financed by capital inflows.
With inflation of about 1% y/y and a policy rate of 5.0%, Chile has the highest real interest rate in the region. Under these conditions, we believe the central bank of Chile (BCCh) has room to reduce its policy rate without jeopardizing its hard-won inflation-targeting credentials. We look for a 50bp policy rate reduction, with one 25bp cut in July and another in August, while the consensus believes that the next move will be a hike in March 2015.
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