Chile’s economy shank less than forecast in the second quarter as growth in the mining industry softened the blow from a prolonged retail slump on the eve of interest rate cuts.
(Bloomberg) — Chile’s economy shank less than forecast in the second quarter as growth in the mining industry softened the blow from a prolonged retail slump on the eve of interest rate cuts.
Gross domestic product fell 0.3% in the April-June period from the prior three months, less than the -0.6% median forecast of analysts in a Bloomberg survey. From a year ago, the economy dropped 1.1%, the central bank reported Friday.
Meanwhile, GDP growth in the first quarter was revised to 0.4%, half of the original 0.8% increase.
Chile’s economy is on track for near-zero growth this year, the worst performance of all major Latin American countries except for Argentina, according to estimates compiled by Bloomberg. Sectors from commerce to services have lost momentum in recent months, with both families and businesses pinched by above-target inflation and tight monetary conditions. Today’s report dates from the period immediately prior to the start of central bank rate cuts in July.
What Bloomberg Economics Says
“Second-quarter GDP figures show Chilean activity below central bank estimates and domestic demand slowly recovering after a sharp adjustment. It supports the outsize rate cut in July. We expect policymakers to continue cutting rates this year and next to gradually normalize monetary conditions.”
— Felipe Hernandez, Latin America economist
— Click here for full report
Mining in the world’s largest copper producer rose 1.1% on the quarter, while all other activities declined by 0.5%, according to the central bank. Mining output has been volatile in Chile in recent months as the industry overhauls some of its aging mines to counter declining ore quality.
“The level of real GDP is some 2% lower than its post-pandemic peak in Q4 2021,” William Jackson, Chief Emerging Markets Economist at Capital Economics, wrote in a note. “This weakness should give the central bank more room to cut interest rates.”
Central bankers led by Rosanna Costa cut borrowing costs by 100 basis points on July 28 and indicated more big reductions are coming as the economy continues to cool while inflation slows toward target.
During the second quarter, construction fell by 0.7%, while the category including wholesale, retail, restaurants and hotels tumbled by 3.4%.
Withering demand is hurting restaurants such as Peru Mil Delicias, which is located near the La Vega open air food market in the center of capital city, Santiago.
“The situation is horrible. We used to be full from early hours with people having breakfast and lunch,” said Jennifer Polanco, a 36-year-old-waitress as she stood outside trying to lure customers. “Many restaurants have had to fire waiters.”
Going forward, the South American country faces headwinds from uneven global growth, including woes in China, which is Chile’s top trading partner. Those concerns have weighed on the prices of raw materials including copper, its top export.
Locally, President Gabriel Boric’s administration is working to lure more foreign direct investment. More than 50 firms from around the world have expressed interest in participating in Chile’s new public-private lithium model, Karla Flores, head of InvestChile, said in a recent interview.
READ MORE: More Than 50 Firms Want In on New Lithium-Mining Model in Chile
Meanwhile, the government is struggling to advance its reform agenda, which includes a proposal for greater state participation in pensions, as well as a plan to boost tax income. The administration is renewing talks with opposition lawmakers, and analysts expect the legislation will get watered down again.
Chile’s economy will expand just 0.2% this year, according to Finance Ministry estimates published in July.
–With assistance from Rafael Gayol and James Attwood.
(Updates with economist comments in fifth paragraph, details throughout)
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