Chile: GDP growth weakens in the first quarter
May 17, 2022
Activity softened markedly in the first quarter, with GDP expanding 7.2% year-on-year (Q4 2021: +12.0 yoy). Q1's reading marked the worst reading since Q1 2021. On a seasonally-adjusted quarter-on-quarter basis, economic activity declined 0.8% in Q1, contrasting the previous quarter's 1.7% expansion and driven by declines in both the mining and non-mining sectors. Q1's reading marked the worst reading since Q2 2020.
The downturn in annual growth was broad-based, with private consumption, public spending, fixed investment and exports all weakening. Private consumption growth fell to 13.9% in Q1 (Q4 2021: +16.1% yoy), as inflation rose and the impulse from past fiscal stimulus and pension drawdowns faded somewhat. Government consumption growth moderated to 9.1% in Q1 (Q4 2021: +11.0% yoy). Fixed investment growth fell to 8.8% in Q1 (Q4 2021: +19.9% yoy), amid slowdowns in construction and machinery investment.
Exports of goods and services contracted 1.4% in Q1 (Q4 2021: +0.6% yoy amid lower exports of copper and fruit. In addition, imports of goods and services growth waned to 17.5% in Q1 (Q4 2021: +38.4% yoy).
Looking forward, in Q2 our analysts expect a further slowdown in year-on-year growth and another contraction in quarter-on-quarter terms. Economic headwinds are increasing as inflation and interest rates rise, while uncertainty over the outcome of the constitutional process will likely subdue business investment. Moreover, the government of Gabriel Boric is so far maintaining a prudent fiscal stance, meaning the growth impulse from government spending will be much lower than last year.
On the longer-term outlook, analysts at the EIU commented:
“Although we assume that macroeconomic policy will remain prudent for now, the new constitution is likely to include reforms that will weigh on the business environment. In this context, gross fixed investment will decrease to an average of 2.3% in 2023-26 (below pre-pandemic levels). Overall, real GDP growth will moderate to an average of 2.1% in 2023-26, which is low by Chile's standards.”
Author: Oliver Reynolds, Economist