Chile: Chile's economy is gradually on the mend, but growth in Q2 remains meager
August 18, 2017
Chile’s economy managed to crawl back to its feet in Q2, after registering in the prior quarter its worst performance since the height of the global financial crisis in 2009, on the back of a large contraction in the mining sector. GDP expanded 0.9% year-on-year (yoy) in Q2, which was an improvement from Q1’s 0.1% yoy growth but still marked one of the lowest figures in recent years. The heady growth rates the country enjoyed until 2013 due to the commodities supercycle are now firmly a thing of the past, with the economy slowly adjusting to the lower-copper-price environment.
The expansion in Q2 was driven by robust domestic demand, with private consumption growth picking up pace (Q2: +2.6% year-on-year; Q1: +1.8% yoy). Consumers’ purchasing power was boosted over the quarter by lower inflation, while sentiment among households saw a sustained improvement in Q2 following several years in the doldrums. Signs of greater optimism were evidenced by a notable uptick in spending on durable goods. Public spending growth was fairly modest (Q2: +2.7% yoy; Q1: +4.9% yoy), as the government continued to pivot towards a less expansionary fiscal stance in order to reduce the budget deficit and slow the rise in the public debt-to-GDP ratio, as projected in the 2017 budget. However, fixed investment remained the Achilles’ heel, contracting for the fourth consecutive quarter (Q2: -4.1% yoy; Q1: -2.4% yoy). As has been the case in recent quarters, investment in construction dragged down the overall figure. Firms in the construction sector are reluctant to invest while the supply of homes remains at a multi-year high, and there are signs that tighter mortgage requirements are deterring some buyers.
The external sector performed feebly in Q2, with exports of goods and services declining 3.5% yoy (Q1: -4.2% yoy). This was partly due to an overhang from the strike at the Escondida mine during Q1, as production at the site resumed only gradually during Q2. Imports grew 7.0% in Q2 (Q1: +4.6% yoy), with the net contribution of the external sector consequently deteriorating from minus 2.6 percentage points in Q1 to minus 2.9 percentage points in Q2.
Looking ahead, growth is forecast to move back towards its potential, estimated at between 2.5% and 3.0% by the Central Bank, over the next few years. Improved business and consumer confidence, stronger regional growth and a loose monetary stance should all contribute to improving Chile’s economic performance. However, the process will be gradual, with fixed investment expected to remain weak this year and government spending growth constrained by the need to tame the fiscal deficit.
Author: Oliver Reynolds, Economist