Looking ahead, elevated copper prices, improved confidence levels, growing credit demand point at an improvement in 2018
Industrial production ended 2017 on a weaker than expected note. Overall, industrial production contracted for the second consecutive year in 2017 (-0.5% versus -1.5% in 2016), still dragged down by mining and manufacturing (although both moderated their falls). Looking ahead, elevated copper prices, improved confidence levels, growing credit demand point at an improvement in 2018. Despite of the soft finish to 2017, we expect the central bank to stay on hold at its first monetary policy meeting (February 1).
The industrial production index expanded 0.3% year over year in December (2.4% in November), leading to growth of 2.4% in the final quarter of 2017 (3.2% in 3Q17 and -1.7% in 2Q17). The month was hampered by two fewer working days. Once corrected for both seasonal and calendar effects, growth in December was 1.9% (2.3% in November) and 2.7% in the quarter (3.7% in 3Q17). Mining was the activity driver in the month, rising 4.2% year over year (3.9% previously), contributing 1.8pp to the headline industrial production gain in the month. Meanwhile, manufacturing production contracted 3.4% year over year (Bloomberg market consensus: +0.5% Itaú: +1.2%), down from the +2.3% recorded in November. Once corrected for calendar and seasonal effects, manufacturing dropped by a more mild 0.5%. The main drag to manufacturing was beverages production as well as manufact ured paper, contributing a combined -1.6pp to headline growth. On the other hand, metal related manufacturing contained the fall with a positive contribution of 0.6pp. Utilities contracted 0.7% year over year (-3.5% in November), dragged down once more by gas production.
Mining and manufacturing were less of a drag in 2017. In 4Q17, mining production increased 6.0%, similar to the rate in 3Q17, resulting in a 1.2% decline in 2017 (-3.7% in 2016). Manufacturing fell 0.2% in the quarter (+0.9% in 3Q17) and contracted 0.1% in the year (-0.5% in 2016). However, after correcting for seasonal and calendar effects, manufacturing actually increased 0.6% in 4Q17 (1.4% in 3Q17) and rose 0.6% in 2017 (-1.0% in 2016). Meanwhile, utilities fell 1.0% in the quarter (+2.0% in 3Q17), resulting lower growth of 0.6% for the year (+3.3% in 2016).
At the margin, all activity indicators moderated. With mining returning to near capacity operational levels, production decelerated to -3.7% qoq/saar, from the 39.8 qoq/saar in 3Q17. Manufacturing fell 3.0% qoq/saar, from +4.0% in 3Q17. Overall, industrial production declined 5.9% qoq/saar (21.9% in 3Q17 and 1.7% in 2Q17).
In 2018, activity growth will easily double the 1.5% estimated for 2017 (1.6% in 2016). Higher global growth, improved private sentiment and expansionary monetary policy will all boost the recovery.