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Chile: sentiment stands near neutral levels whereas monetary policy expectations remain unchanged for the upcoming months


August 20, 2018 ( Newswire) Last week's highlights: Both consumer confidence and business sentiment fell in Jul-18. According to Adimark, the consumer confidence index fell 2.7pp in Jul-18 vs the previous month, reaching the neutral level of 50 for the first time since Mar-18. Overall, most components of the index descended in Jul-18 with a strong drop being observed in employment expectations (-7.7pp), which is in line with the main risk currently faced by the Chilean economy, namely a still weak labor market. On its part, Icare announced that business sentiment decreased 2.9pp to 52.1pp in Jul-18, the lowest level since Dec-17. This trend was led by a significant contraction of mining confidence (from 65.4 in Jun-18 to 53.1), although the only sector that posted an increase in sentiment was construction (from 43.1 to 46.1), so commerce and manufacturing recording lower levels as well. Though both consumer and entrepreneurs sentiment remain at higher levels compared to those seen in previous years, their recent decrease seems to be aligned with comments from firms that the recovery of activity has been slower than expected so far this year despite the recent improvement in leading indicators. Recall that, according to the latest Business Perception Report (IPN), most companies postponed the expectations of a stronger recovery of activity towards the end of 2018 and 1Q19 considering that observed results have been lower-than-initially-projected (see full note).

Financial traders now expect the monetary policy rate to stand at 3.25% in the next 12 months vs 3.0% estimated by economists. According to the Financial Traders Survey, the policy rate would reach 3.25% in the next twelve months, meaning an increase of 25bp against the previous month. That said, 3-month and 24-month ahead expectations remained stable at 2.75% and 3.75%, respectively. For their part, economists held their forecasts for all horizons, so that the policy rate would stand at 2.75% by year-end, 3.0% by Aug-19 and 3.5% in two years. As for inflation, both financial traders and economists are forecasting an advance of the CPI of 0.2% m/m in Aug-18. Importantly, analysts now see year-end inflation at 2.9%, a rise of 10bp vs Jul-18, which is in line with the upside surprise observed the last month. In any case, 12-month ahead inflation expectations kept unchanged at 3.0% in both surveys. Finally, we highlight that GDP growth projections from economists remained stable for both 2018 and 2019 at 4.0% and 3.8%, respectively.

The Main data and events to come

  • Today, the BCCh will publish the GDP figures of 2Q18 (Credicorp: 5.20% y/y, in line with the consensus).

Colombia: upside risks on growth starting to materialize

Last week's highlights

  • GDP grew by 2.8% y/y in 2Q18, the strongest pace since 3Q15 (see full note), coming in above market consensus and our estimate (both at 2.5% y/y). It is worth noting that 2Q18 had two more business days than 2Q17, which positively contributed to the observed figure. In any case, the economy continued to gain traction compared to the figure observed in 2017 (1.8%) with most sectors expanding this quarter (ten out of twelve). The dynamics seen in 2Q18 confirm the materialization of upside risks to our very long-held GDP growth forecast for 2018 (2.3% y/y); we now anticipate that it will be in the range of 2.7% y/y to 3.0% y/y. We expect a further acceleration of activity in 2H18 following the victory of Ivan Duque in the presidential elections, primarily due to the execution of investment projects that had been postponed in 1H18 amid high political uncertainty. Likewise, the risk balance for our 2019 estimate of 3.3% y/y remains tilted to the upside as a result of both the carry-over effect from higher-than-expected 2018 growth and better fundamentals, such as high oil prices and improved sentiment. We will fine tune our projections and set specific numbers following the DANE release of demand-side figures this week (August 22nd).

2Q18 activity figures further support our view of a stable monetary policy stance during the remainder of the year, implying that the repo rate will remain at 4.25% until 1H19. (We predict that the first rate hike will occur in Apr-19). In addition, we believe that the recent increase in global risk aversion is another factor that suggests that the monetary authority will remain cautious in upcoming months.

  • Activity leading indicators: private consumption continues to lead as retail sales came in solid again in Jun-18 (see full note). Leading indicators continued to show improving economic activity in Jun-18. Specifically, retail sales rose 6.3% y/y, above the market consensus (4.7% y/y) but close to our forecast of 5.7% y/y. However, manufacturing production slowed to 1.3% y/y (May-18: 2.9% y/y), below expectations (Credicorp: +1.9% y/y; consensus: +2.0% y/y).
  • Setback of consumer confidence in Jul-18. According to Fedesarrollo, the consumer confidence index dropped 5.7pp on a monthly basis in Jul-18 to 9.8%, ending a 4-month improving trend. That said, this level means an increase of 19.3pp compared to Jul-17. The monthly deterioration was mostly explained by the expectations component, which fell 8pp m/m to 16.6%, while the current conditions sub-index deteriorated from 1.9% to -0.4%. The index could continue to fall (though slightly) in the coming months, considering the recent comments of the MoF Carrasquilla regarding the upcoming fiscal bill as he mentioned that the new administration is considering a broader base for the personal income tax, while the recent depreciation of the COP could take a toll also. In any case, the improvement of consumer confidence has been remarkable this year (+15.8pp YTD).

Main data and events to come

  • On Thursday, Fedesarrollo will release retail and industrial confidence for Jul-18.

Peru: economic activity surprised to the downside in Jun-18

Last week's highlights

  • Economic activity surprised to the downside in Jun-18. (see full note) After the strong growth rates of Apr-18 (7.8% y/y) and May-18 (6.4% y/y), economic activity slowed to 2.0% y/y in Jun-18 (Reuters survey: 3.6% y/y). Moreover, the seasonally-adjusted series showed a 1.2% m/m contraction. Despite the deceleration of activity in Jun-18, GDP growth reached 5.4% y/y in 2Q18, an 18-quarter high. Furthermore, non-primary GDP grew 5% y/y in 2Q18, its strongest pace in almost 5 years. Due to a higher-than-initially-expected growth of 2Q18, and an accelerated investment schedule in the Quellaveco mining project (between USD 1,000mn and 1,300mn in 2019), we recently increased our GDP growth forecast to 4.0% in 2018 and 3.7% in 2019 (from 3.8% and 3.5%, respectively).

After a 4.3% y/y expansion in 1H18, we expect a moderation of GDP growth in 2H18 towards ~3.5% y/y. That said, we expect activity to accelerate in 4Q18 vs 3Q18 if a good second fishing season materializes this year (there was no second anchovy fishing season in 2017), and sub-national public investment avoids a strong slowdown after the elections of local and regional governments in Oct-18.

Main data and events to come

  • On Wednesday, the INEI will release the 2Q18 GDP figures (Consensus: 5.4% y/y, Credicorp: 5.4% y/y).

For charts, tables and the full report, see the pdf file

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