Defending Growth through Domestic Channels

These days there seems to be a plethora of doomsday scenarios that could impact Chile’s economic growth in the coming months. This column has previously highlighted an array of external and policy risks including Europe, China, oil prices and inflation. But in this gloomy economic situation there is at least one bright spot: Chile’s surprisingly resilient and recently stronger-than-expected internal demand. Although demand is ultimately affected by broader external factors, this could propel Chile’s economic growth above the regional average in 2012.

From May 2011 through January 2012, a Central Bank survey of economists showed a consistent decline in the 2012 average GDP growth forecast, starting at 5.5% and ultimately bottoming out at 4.0%. This decline was primarily driven by global geopolitical and macroeconomic factors. However, the most recent data shows a noticeable bounce, reaching 4.6% in April. In addition, the Central Bank increased its forecast range to 4.0-5.0% from 3.75-4.75%, and more importantly raised its internal demand forecast to 5.3% from 3.7%.

The latest upgrades come on the back of strong IMACEC (GDP proxy) readings of 5.5% and 6.1% year-over-year in January and February, respectively. Taken on a seasonally adjusted basis, the data looks even stronger, coming in at 9.3% in February. Excluding the volatile mining sector, economic activity grew a healthy 6.9%.

Domestic demand continues to be the key driver of Chile’s growth. The most relevant leading indicator is retail sales, which increased 12.4% in February year-on-year in line with higher consumer confidence levels (49.3 according to Adimark’s Index of Economic Perception, up from 2H11 readings in the low 40s). This has been helped by low unemployment, which reached 6.4% for the period December-February, the lowest such figure since 2007. The latest employment data from the National Statistics Institute (INE) highlights a historically high labor participation rate of 60% with the workforce continuing to grow.

Furthermore, despite tighter access to credit, expansion remains robust. In the latest Central Bank credit survey, 24% of banks reported more restrictive conditions for consumer loans while 23% reported tighter conditions for mortgages. Despite efforts by banks to limit credit expansion in anticipation of potential legal reforms, credit quality remains solid while demand continues to grow. In the same survey, 6% of banks reported stronger demand for consumer loans, while 39% noted stronger demand for mortgages.

At the same time, credit demand from companies has also remained strong (over 30% of banks report stronger demand) with arguably less restrictive conditions, which should bode well for the investment side of the internal demand equation. An ad hoc survey of corporate capital expenditure plans tends to support this, with most companies in Chile looking to invest more this year on domestically oriented projects. There is particular dynamism in electricity, retail, mining and construction. 

Although external risks remain and we are likely to see at least temporarily lower activity readings in the coming months, Chile appears poised to defend growth through domestic channels this year and achieve levels of economic activity near the upper limit of the Central Bank range. This would place Chile at the higher end of the GDP growth spectrum in the region (consensus 2012 GDP growth at 3.4% and 3.2%, respectively, for Brazil and Mexico). 

Brian P. Chase is Portfolio Manager, Head of Andean Equities, at Itau Asset Management