Chile Economy Contracts for First Time in a Year as Recovery Stalls

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(Bloomberg) -- Chile’s economy contracted on a quarterly basis for the first time in a year, marking a significant downturn that bolsters the case for a resumption of interest rate cuts.

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Gross domestic product fell 0.6% in the second quarter from the prior three months, in line with the median forecast of analysts in a Bloomberg survey. From a year ago, it expanded 1.6%, the central bank reported on Monday.

Chilean policymakers paused their easing cycle last month as they weighed near-term inflationary pressures against a downturn in the economic recovery. That deterioration became more stark today, with the central bank reporting that investment slumped 8.7% year over year amid persistently high long-term interest rates. Traders are betting on two more quarter-point borrowing cost cuts by December.

What Bloomberg Economics Says

“Growth came in below central bank forecasts, indicating a negative output gap. With copper prices also dropping below policymakers forecasts, we see room for additional interest-rate cuts once inflation and financial stability risks fade.”

— Felipe Hernandez, Latin America economist

— Click here for full report

On a quarterly basis, the mining industry dropped 1%, while the rest of the economy contracted 0.6%. The yearly slump in investment was led by declines in vehicles and electronics equipment, the central bank reported.

Still, the bank revised higher the quarterly growth from the January-March period, to 2.1% from 1.9% previously.

Economic Forecasts

Last month, the government trimmed its economic growth forecast for this year to 2.6% from 2.7%. Meanwhile, analysts surveyed by the central bank expect an expansion of 2.3%, down from 2.5% in July.

In the minutes to its July policy meeting, central bankers wrote that data from the April-June period showed slower-than-expected activity. “However, a more thorough analysis pointed to some specific factors in this result, while domestic demand performed relatively in line,” they wrote.

State-owned copper company Codelco posted a decline in first-half production due to output disruptions at mines and delays at expansion projects following years of underinvestment. The price of the red metal, which is Chile’s top export, has also slipped to just over $4 per pound from a high above $5 in May.

Going forward, activity will be helped by monetary easing that shaved 5.5 percentage points from the benchmark rate in the 12 months through July. In the longer-term, the economy will also be boosted by an increase in planned, large-scale investments, notably in the mining sector.

“The 0.6% q/q fall in Chilean GDP in Q2 is mainly payback for a strong Q1, and we expect a return to positive growth in Q3,” Kimberley Sperrfechter, an emerging markets economist at Capital Economics, wrote in a research note. “The weakness shown in Q2 means that there’s scope for the central bank to deliver two more 25bp interest rate cuts” this year.

--With assistance from Giovanna Serafim.

(Updates with economist comments starting in the fourth paragraph)

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Chile Economy Contracts for First Time in a Year as Recovery Stalls

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