Santander s Economic Report

Transcription

1 Inicio Santander s Economic Report Research Third Quarter 216

2 Foreword Chile has new opportunities due to the renewed interest of global investors in emerging economies. Nonetheless, the domestic economy is expected to grow around 2% in 217, a similar figure to recent years. Consumption will remain depressed due to lower incomes and pessimistic expectations. However, the adjustment suffered by investment will be reversed owing to a boost in spending on machinery and equipment, as the construction sector will fall. The labor market will demonstrate fragility, as it is expected that the quality of employment will gradually decline, and the unemployment rate will rise. Inflation has declined and is once again within the Central Bank s target range, and we expect it will end 217 at 3%. Thus the monetary policy interest rate will remain low and stable for some time. The factors that could cause low growth are: (i) a surprise increase to the fed funds rate; (ii) new terrorist attacks in Europe; (iii) an unfavorable Brexit resolution; (iv) a deterioration of China s financial system; (v) restrictions on oil production, or (vi) a more stressed internal environment that impacts confidence. Research 2

3 Economic outlook Table 1 International baseline scenario Santander BCCh Santander BCCh LME copper price (US$/lb, aop) Brent oil price (US$/bbl, aop) Major trading partners GDP (% YoY) Terms of trade (% YoY) ,1 -.3 Source: Central Bank of Chile, Bloomberg, IMF & Santander. Table 2 Table 3 Domestic outlook GDP components (percent change YoY) Santander BCCh Santander BCCh Santander BCCh Santander BCCh GDP (percent change YoY) Domestic demand (percent change YoY) Inflation (%, eop) Inflation (%, aop) Unemployment rate (%, aop) MPR (%, eop) Exchange rate ($/US$, eop) Exchange rate ($/US$, aop) Current Account (% GDP) Total consumption Household consumption Government consumption Gross fixed capital formation Construction Machinery and equipment Exports Imports Source: Central Bank of Chile & Santander. Source: Central Bank of Chile, National Statistics Institute (INE) & Santander. Research 3

4 External outlook > The external outlook is expected to be more positive for our economy from the second half of the year. Despite lower global structural dynamism, Chile and the other Latin American economies which have been particularly susceptible to the volatility of commodity markets have new opportunities owing to the flow of capital to the finance sector from global investors with renewed interest in the region. > U.S.: The dynamism of consumption has been compressed by weak investment leading to growth forecasts for the year to shrink from 2.2% to 1.7%. However, the pace of the labor market and the consolidation of consumer confidence indexes indicate a rise in the U.S. reference interest rate towards the end of the year. > China: The authorities have taken steps to ensure growth rates and stimulate activity in isolated regions, leading to estimated growth of 6.6% and 6.2% for this year and next respectively. Fuente: Bloomberg y Santander. Research

5 external outlook > Rest of developed world: The slow recovery process will continue. Eurozone countries will grow 1.5% this year, recovering the production level they had in 28. A slightly lower expansion of 1.2% is forecast for next year. Furthermore, both Japan and the United Kingdom will continue easing their monetary policy in response to depressed growth and low inflation. > Latin America: The outlook is more positive than a few months ago. Although there are no indicators that support a forecast of sustained recovery of regional growth and wellbeing, the region s greater relative attraction, as shown by higher investment flows, has led to improved growth estimates for 217. > Commodities: Volatility has been the norm and we expect this to continue although with a growth trend. Oil will average US$/bbl, and copper will have an average price of 2.15 US$/lb in 216 and 2.2 US$/lb in 217. Graph 1: Brazil s actual and forecasted GDP (percent change YoY) e 217e Source: Bloomberg & Santander. Research 5

6 Domestic outlook > GDP: The Chilean economy will grow by 1.6% and 2% YoY this year and next respectively. We expect increased activity to come from the external sector, government consumption, and private consumption of durable goods and services. > Consumption: Its expansion is determined by the modest performance of the payroll and job placements. A better than expected result is possible due to the recovery of expectations, in particular the willingness to spend. 6 Graph 2: Contribution to GDP growth (%) 2 Graph 3: Expectations (deviations from 5) 2-2 Avg e 217e 1-1 Household consumption Government consumption Gross capital formation Net exports GDP Source: Central Bank of Chile & Santander Business confidence Household confidence Source: Adimark, Icare & Santander Graph : Labor income and household consumption (percent change YoY) Graph 5: Contribution of household consumption components to growth (%) Q12 1Q13 1Q1 1Q15 1Q16 1Q17e Household consumption Labor income Source: Central Bank of Chile, National Statistics Institute (INE) & Santander Q1 3Q1 1Q15 3Q15 1Q16 Durable goods Non-durable goods Services Household consumption Source: Central Bank of Chile & Santander. Research 6

7 Investment > Investment: Dynamism will be focused on machinery and equipment given that construction will experience a continuous deceleration. The performance of the Chilean peso, as well as a change in business confidence, could improve the growth trend. > Our forecast is that, after two years, investment will grow again by.7% YoY in 216, and by.% YoY in 217. Graph 6: Five-year investment portfolio (US$ million) 12, 1, 8, 6,, 2, 1Q13 3Q13 1Q1 3Q1 1Q15 3Q15 1Q16 Mining Infraestructure Energy Real State Other Source: CBC & Santander Graph 7: Authorized sites for new works (percent change YoY,rolling year) - Jan-1 Jun-1 Nov-1 Apr-15 Sep-15 Feb-16 Jul-16 Total Housing Rest Source: INE & Santander Graph 8: Investment in machinery and equipment, and capital goods imports (percent change YoY) 1Q13 3Q13 1Q1 3Q1 1Q15 3Q15 1Q16 Machinery and equipment Capital goods imports Source: Central Bank of Chile & Santander. Research 7

8 external SECTOR AND PUBLIC SECTOR > External sector: Although the value of exports and imports has fallen compared to the previous year, it has increased in real terms and we expect this trend to continue. The positive performance of agricultural exports should be joined by the manufacturing sector driven by the new dynamism of our regional business partners. Imports should also increase in line with activity. > Fiscal situation: Public spending austerity clashed with increased government consumption of 5.7% YoY in the first half of the year. Although we expect government spending to slowdown during the rest of the year, it will continue to be a source of growth. As a result of lower fiscal revenues, we forecast an effective deficit at year end of 3.3% of GDP. > Next year, in line with the structural balance commitment, spending should grow at around 3.%, leaving the deficit at 2.8% of GDP. Graph 9: Central Government accrued and structural balance (% of GDP) Avg e 217e Accrued balance Structural balance Source: Finance Ministry &Santander. Graph 1: Public debt (% of GDP) Q6 1Q7 1Q8 1Q9 1Q1 1Q11 1Q12 1Q13 1Q1 1Q15 1Q16 Gross debt Net debt Source: Budget Department & Santander. Research 8

9 ECONOMIC SECTORS > Economic sectors: Sectorial activity will be heterogeneous. Services will present growth figures higher than GDP, except for business services. Next year, in addition to the impressive performances of agriculture and of electricity, gas and water, a slight improvement in mining, manufacturing and commerce is expected. Graph 11: Mining and manufacturing production (percent change YoY) Source: Central Bank of Chile & Santander. Table Growth by economic sector (percent change YoY) Avg Agriculture & Forestry Fishing Mining Manufacturing Industry Electricity, Gas & Water Construction Wholesale and Retail Trade Restaurants and Hotels Transport Communications Financial Services Business Services Housing Services Personal Services Public Administration GDP Source: Central Bank of Chile & Santander. Research 9

10 Jan-16.3 Feb-16. Mar Apr-16 May-16 inflation and employment Graph 12: Effective and forecasted CPI (%). Jun-16.2 Jul-16. Aug-16.6 Sep-16.3 Oct Nov-16 Percent change MoM Dec Percent change YoY (right) Source: INE & Santander. Graph 1: Creation of employment by category (percent change YoY) Aug-1 Dec-1 Jan-15 Aug-15 Dec-15 Apr-16 Own-account workers.2.2 Jan-17 Feb-17. Mar-17.2 Apr-17.3 May-17 Employees Jun-17 Jul-17 Source: INE & Santander. Ago-17. Sep Oct-17 Nov-17.1 Dec > Inflation: We forecast inflation will end the year at around 3.% YoY to position itself in next March in the center of the Central Bank s target range. This is a consequence of the reduced depreciation of the peso currency together with slack in economic capacity on the one hand, and increased oil prices, wage indexation and tighter company margins on the other. > Employment: The deterioration of the labor market is demonstrated by the quality of new employment, lower wage growth and slow creation of private-sector employment, which is offset by self-employment and the public sector. Thus the unemployment rate should reach a peak of 7.% and average 6.8% this year. Next year we forecast an average unemployment rate of 7.2%. Graph 13: Labor market indicators (percent change YoY and rate) Jan-16 May-16 Sep-16e Jan-17e May-17e Sep-17e Employment Labor force Unemployment (right) Source: INE & Santander. Graph 15: Employment by economic sector: growth & incidence (percent change YoY) Aug-15 Oct-15 Dec-15 Feb-16 Abr-16 Jun-16 Agro. & Fishery Construction Public Adm. & Social Security Housekeeping Services Total Mining W. & R. Trade Manufacturing Rest Source: INE & Santander Research 1

11 EXCHANGE RATE AND INTEREST RATES > Exchange rate: Following a significant appreciation due to inflows to the region, the exchange rate has reverted to a devaluation trend. Hence in 216 we forecast an average of 68 Chilean pesos/us dollar, to close in December at 679 Chilean pesos/us dollar. Graph 16: Exchange rate and forecasts ($/US$) Mar-1 Dec-1 Sep-15 Jun-16 Mar-17 Dec-17 Confidence interval (5%-95%) US Dollar Source: Bloomberg & Santander. > Interest rates: In the base case we expect the Monetary Policy Rate (MPR) to remain at 3.5% this year and the following. 5 Graph 17: MPR & expectations (%) 3 2 Mar-1 Mar-15 Mar-16 Mar-17 Mar-18 MPR Implicit swaps Santander EOF EEE Source: Central Bank of Chile, Bloomberg & Santander. Research 11

12 Fundamentals of the Chilean Economy > The Chilean economy has shown an adjustment process after the end of the super-cycle of commodities prices and investment, together with a global deceleration, among other factors. > Consequently, structural variables of the economy have changed. > According to our estimation, the potential output of the Chilean economy is 3.5% YoY, 1 percentage point (pp) less than the estimated a couple of years ago. The Central Bank of Chile recently suggested a value of 3.2% YoY. The downward shift is explained by the lower investment, the adjustment of the labor market and by a reduction of productivity (TFP). > The lower potential output of the economy is coherent with lower yields in global interest rates. Our estimation suggest that currently the Neutral Monetary Policy Rate is roughly.25%, 1 pp less than the one estimated for the last expansion cycle. > Finally, the evolution of the labor market and a reduction of domestic inflation pressures, lead us to update our Non-Accelerating Inflation Rate of Unemployment (NAIRU) which is estimated in 6.%,.3 pp higher than our previous computation. Graph 18: Potential output (percentage change YoY) Graph 19: Neutral Monetary Policy Rate (percentage) Graph 2: NAIRU (percentage of labor force) GDP Potential Output Source: Central Bank of Chile & Santander Jan-13 Aug-13 Mar-1 Oct-1 May-15 Dic-15 Long run MPR Tendency Source: Bloomberg & Santander Dic-9 Oct-1 Aug-11 Jun-12 Apr-13 Feb-1 Dic-1 Oct-15 NAIRU Average NAIRU Unemployment rate Source: INE & Santander. Research 12

13 Research Finance Division Felipe Bravo Gabriel Cestau Álvaro González Camilo Vio Chief Economist Economist Economist Economist This report has been prepared with the only purpose of providing information to the customers of Banco Santander Chile, and it reflects the views of the Research Area, but not necessarily that of Banco Santander Chile. The views expressed in this paper are those of the its authors and should not be attributed to the Bank, its Board of Directors, or its management. The purpose is to contribute to the national debate on this matter. It is not an application or an offer to purchase or sell any of the shares or securities mentioned in this paper. This information and that on which this information is based have been obtained from sources that appear to be reliable to us. However, this does not guarantee accuracy or completeness. Projections and estimates in this paper have been prepared by our team, supported by the best tools available. Nonetheless, this does not guarantee their realization. The views and statements contained in this report will not be necessarily updated and may be subject to change without notice. The outcome of any financial operation conducted based on the information contained in this paper is the sole responsibility of those who conduct such operation.

14 Resumen Ejecutivo Panorama Externo Panorama Doméstico Santander s Economic Report Third Quarter 216 Research