Chile: Chilean economy slows in Q2 on weak external sector
August 18, 2016
The economy of the world’s largest copper producer decelerated in the second quarter as copper prices stayed low and business and consumer sentiment remained depressed. GDP growth slowed from Q1’s 2.2% year-on-year expansion to a meagre 1.5% increase in Q2. While this marked the slowest expansion in nearly two years, it beat market expectations of a more pronounced deceleration to 1.1% growth. Q2’s downturn mainly reflects a poorer performance by Chile’s external sector as copper exports fell. Conversely, surging public spending and an uptick in fixed investment supported the expansion.
In Q2, a rebound in imports more than outdid a pickup in exports, bringing the external sector’s contribution to overall economic growth down to the lowest level in three quarters. Exports remained lackluster in Q2, accelerating from Q1’s 0.9% growth to a 1.2% increase. While exports of goods benefited particularly from a rebound in exports of agricultural, fishing and industrial products, copper exports deteriorated notably and contracted a hefty 6.3% in Q2 (Q1: +2.5% year-on-year). Low copper prices, which have been dragging on Chile’s economy for over two years now, were mainly behind the fall. Meanwhile, tourism continued to be the main driver of exports of services. Imports swung from contraction to expansion and recorded the largest expansion in three quarters, growing an annual 0.6% in Q2 (Q1: -3.2% yoy). Turnarounds in all sub-categories of goods imports drove the result, with agricultural and fishing imports seeing a notable surge. As a result, the external sector’s net contribution to overall economic growth fell from 1.5 percentage points in Q1 to 0.2 percentage points in Q2.
In other developments, domestic demand strengthened in Q2. Growth in domestic demand accelerated from 1.1% in Q1 to 1.4% in Q2 on the back of rising public spending and fixed investment. Conversely, private consumption decelerated and inventories dragged on growth. In particular, government consumption strengthened to a 7.0% increase (Q1: +4.4% yoy), while household spending slowed to a 1.7% expansion (Q1: +2.6% yoy). Fixed investment continued to recover, rising to 2.7% growth in Q2 (Q1: +1.1% yoy), but still remained far below the strong expansions seen in the years of the commodities boom.
On a quarter-on-quarter basis, GDP dropped 0.4% in seasonally-adjusted terms, marking the first contraction in over six years and a notable deterioration over Q1’s 1.1% increase. Chile’s performance in Q2 highlights that the economy continues to be restrained by low copper prices, weak economic sentiment and uncertainty about the government’s economic reform agenda, including the planned constitutional and pension reforms. While Chile underwent notable economic expansions from 2010 to 2013, growth has been broadly hovering around 2.0% since 2014 as the slide in copper prices has been dragging on mining, exports, fixed investment and the state coffers overall.