SANTIAGO: Chilean manufacturing production for October substantially undershot forecasts on Friday, but a surprisingly strong rise in retail sales lends further evidence of a two-speed economy that creates a quandary for monetary policy.
The national statistics agency INE reported a 3.2 percent decrease in October factory output compared with a year earlier, a steeper drop than the fall of 0.8 percent seen in a median forecast of 10 analysts in a Reuters poll.
The result was weaker than even in the most pessimistic projection in the poll.
However, October retail sales grew strongly, up 13.4 percent versus a year ago, marking the highest rise in 2013, and accelerating from a 7.1 percent rise in September.
INE data showed sales growth spanned a wide range of products, including cars, clothing and food.
While Chile's export-led manufacturing has struggled in 2013 year to date it fell 0.3 percent versus last year its shopping malls have remained full, as domestic consumption has kept the economy motoring. Year-to-date retail sales climbed 10.2 percent from a year earlier.
"The biggest stand-out of today's data were retail sales," said BCI economist Antonio Moncado. "The significant acceleration in sales was something the market wasn't expecting."
The dichotomy between strong retail sales and weaker manufacturing activity was characteristic of other countries in Latin America, said Goldman Sachs' Tiago Severo.
Neighboring Andean country Peru, another mining-intensive nation, has seen a similar pattern in recent months.
A dynamic labor market is part of the reason behind it. Although Chile's jobless figures edged up slightly in October to 5.8 percent, according to the INE, they are still hovering near multi-year lows.
The data sends mixed signals to the central bank, which cut interest rates the last two months in a row in order to stimulate the economy.
In its reasoning, the bank has cited slower world growth, less favourable terms of trade and an expected cooling of domestic demand.
In a poll published by Chile's central bank this week, traders expected the bank to pause for breath in December but continue its easing cycle in 2014.
Central bank president Rodrigo Vergara said last week that the key interest rate was now 'neutral'.
Friday's data would both increase the likelihood of an interest rate hold on Dec. 12 and lead the bank to reassess the need for further monetary easing next year, Severo said.
The bank is due to issue its quarterly Monetary Policy Report on Tuesday, which the market will watch closely for signs of the bias it will take in coming months.
Chile is in an election year and the presidential victor on Dec. 15 widely expected to be centre-left Michelle Bachelet will need to balance pledges to spend more on education and health with the restraints of a moderately slowing economy.
FALL IN PAPER AND METALS OUPUT, COPPER MINING UP
The national statistics institute said that the unexpectedly low figure for October was largely due to a strong performance for the same month a year ago, when extra working days and a surge in fish and dairy production boosted output.
The figure was also hurt by a fall in the production of some metal products, as demand declined for steel balls used in mining processing and for ferromolybdenum from China, and in cellulose used in paper production.
Paper was Chile's third-biggest industry by export sales last year, driven by increasing demand from China.
Copper production Chile's biggest industry by far rose 6.5 percent in October versus a year ago, likely partly due to a recovery at the massive Collahuasi mine.
Month on month, manufacturing rose 16.3 percent in October versus September, which is traditionally impacted by independence day holiday celebrations.
In September, production slipped 1.0 percent year on year. October was the third straight month in a row which has seen a fall in the manufacturing rate, when measured against a year earlier.
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