CHILE – Going Into the Q1 2009 GDP Figures: Any Good News?

Chile’s Q1 2009 GDP data came in tandem with our and the market’s expectations, printing a sharp decline of 2.1% y/y from the meager expansion of 0.2% in Q4 2008.  A rough breakdown of the figures shows a dramatic collapse of domestic demand, -7.6% in Q1 2009 from -0.2% in Q4 2008, and a rapid deceleration in exports, -2.7% Q1 2009 from 3.4% in Q4 2008.  Imports contracted at a faster pace than expected, -14.8% from a residual growth of 1.8% in Q4 2008, thus, certainly alleviating a more pronounced decline in output.  Adjusted for seasonal factors, GDP posted a decline of 0.6% q/q (-2.5% SAAR) following contractions of 2% q/q (-7.9% SAAR) in Q4 2008 and of 0.9% q/q (-3.6% SAAR) in Q3 2009.

Total consumption, which represents more than 78% of GDP, decreased by 0.6% after having expanded by 1.1% in the last quarter of 2008, but the decline could have been worse if it wasn’t for the significant expansion of government consumption (3.9% from 2.7% in Q4 2008).  Private consumption, 66.7% of GDP, collapsed (-1.4% from 0.8% Q4 2008) driven by a sharp decline in durable goods (-18.9%), especially automobiles, as credit conditions remained tight and domestic confidence worsened.  Total investments, another important component of GDP (24.8% of total output), came within expectations (-9.3% vs. 10.4% in Q4 2008), and in this category too, capital goods such as machinery and equipments were hit the strongest (-16%).  We highlight the fact that private investment had the largest negative contribution of 2.3 percentage points on the GDP result, which is larger than the -1.1 percentage points from exports and durable goods consumption. We also find interesting to point out that inventory adjustment was a significant figure too. The negative change in inventories represented nearly 4% of the total GPD and almost 5% of total consumption – we should not forget that the figure is likely to print positive and as significant numbers throughout the rest of the year when the recovery process starts to take place.

If we are looking for any good news on the dataset we find difficult to avoid the importance that the increase in government spending had, a +0.5 percentage point contribution, more than half of the negative contribution that private consumption had (-0.9 p.p.). Indeed, Chile’s prudent conduct of savings for a rainy day came handy and the government put in place an aggressive spending program intended to create jobs and mitigate the effects of the global economic crisis.  The spending package (US$4 billion) on the other hand will likely push the public accounts into the first deficit in six years, and the gap could go as high as 2.9% of the GDP.

On the external front of the national accounts, the sharp decline in copper exports (-10.5%) was definitely significant and its negative contribution of -1.0 p.p. on GDP was the same as the combined contribution of both industrial and all ex-copper mining exports.

Overall, RGE Monitor maintains the view that GDP will likely contract by around 0.4% y/y in 2009 (0% to -1% range) on the back of slower global and regional demand, relatively low copper prices, tighter financial conditions, and limited domestic confidence.  In RGE’s view, domestic and external data and conditions indicate that GDP will likely post a negative print in 1H09 (-2.1% y/y).  Although we anticipate Chile’s economy to bounce back in the 2H09 (+1.3% y/y) as countercyclical policies take hold and external conditions somewhat improve so average growth for 2008 ends at -0.4% y/y, the risk to our scenario is still tilted to the downside.  Finally, the sharp contraction in economic activity, coupled with falling inflation and inflation expectations, vindicates the central bank’s previous aggressive actions.  We expect the central bank to bring the monetary policy rate to 1% by mid-year.