Nader Nazmi, Oscar Munoz - Market Economics
Latam Macro Snapshot | 28 Jun 2013 18:26 | 242 Kb
Supply and demand data diverged further in May. Retail sales data showed continued strong consumer demand while manufacturing and IP data reflected slowing production. Manufacturing production declined 4.2% y/y in May, surprising our and market expectations projecting expansions of 1.3% and 1.7% y/y, respectively. The setback in manufacturing production was broad-based with eight of its thirteen divisions retreating in the month. Apart from being impacted by a high comparison base, the main contribution to the annual contraction came from lower production of chemicals (-12.6% y/y).
On a three-month moving average basis, manufacturing production growth dropped to -1.1% y/y from 0.5% in April (Chart 1). Manufacturing output in the 12-month period ending in May increased only 0.7%, the slowest growth pace since August 2010.
The overall industrial production index (comprised of manufacturing, mining and utility) was largely flat during the month (Table 1, Chart 3). Mining production recovered in May rising 3.0% y/y, owing mainly to a 3.7% expansion in copper output. Utility (electricity, gas and water) production increased 4.6% y/y, helped by electricity generation and distribution.
Retail sales remained robust, rising 13.2% y/y in May on the top of an 11.2% y/y gain in the prior month (Chart 2). Retail sales in the first five months of the year exceeded sales in the same period a year ago by 10.3%. The fact that this year’s May had one more Friday than last year’s likely helped boost retail sales growth. Fundamentally, the sustained strength of retail sales reflects upbeat consumer confidence rooted in a record low unemployment rate and rapidly rising real wages.
Indeed, May employment data released today show the strength of the labour market. Nearly 7.8 million people were employed in May, reflecting 2.0% more jobs than a year ago and keeping the unemployment rate steady at a near-record low of 6.4%. Job creation in finance, sales, construction and education has been strong, compensating for job losses in manufacturing.
Decelerating credit growth, less favourable external conditions and a softening real estate market (building permits dropped 13.8% y/y in May, following a 11.7% y/y decline in April) will begin to partially offset the positive impacts of a solid labour market and strong consumer sentiment on growth, we believe. Weaker growth in China and lower copper prices will likely slow the pace of investment in the mining sector and dampen demand in Chile.
The deterioration in growth outlook together with benign inflation will bring about lower policy rates, in our view. Indeed, we believe that the minutes of 13 June monetary policy meeting released today (see Chile: The 1-2 Punch for a Rate Cut) and continued soft activity data will set the stage for easing. We look for consecutive 25bp rate cuts in July and August for an end-year policy rate of 4.50%.
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