Chile: Economy limps along in Q1
June 5, 2017
Chile’s economy suffered a further slowdown in Q1 after being buffeted by a sharp contraction in the mining sector, due to a strike at the Escondida copper mine and adverse weather conditions at other key sites. Pessimistic business and consumer sentiment also acted as a drag on activity, although the economy did manage to thwart fears of a contraction. GDP grew a paltry 0.1% year-on-year (yoy) in Q1 (Q4: +0.5% yoy), marking the worst quarterly performance since the height of the global financial crisis in 2009 and coming in below the 0.2% analysts had forecast. Growth has been tapering off steadily in recent years, as a result of the end of the commodity super cycle and uncertainty over the government’s reform agenda.
In Q1, growth was dragged down by a fall in fixed investment, despite low interest rates by historical standards (Q1: -2.4% yoy; Q4: -5.0% yoy). Investment in construction took a particularly large hit; the sector is currently in the doldrums, negatively impacted by an ample housing stock in Greater Santiago, highly pessimistic business sentiment and larger mortgage down payments limiting households’ ability to borrow. Private consumption growth remained moderate, aided by low inflation and a labor market which remains fairly healthy, despite an uptick in unemployment in Q1 (Q1: +2.0% yoy; Q4: +2.4% yoy). Government spending growth accelerated (Q1: +5.1% yoy; Q4: +1.7% yoy), although this is likely to be a passing phenomenon, with the 2017 budget committing government to constrain spending increases this year.
The external sector worsened considerably, as a direct consequence of tumbling copper production. Exports declined 4.9% in Q1, below the 2.0% fall recorded in Q4. Over the same period, imports grew 4.2% (Q4: 0.0% yoy). As a result, the external sector’s net contribution to growth declined from minus 0.6 percentage points in Q4 to minus 2.7 percentage points in Q1.
Looking ahead, growth should pick up slightly over the rest of the year, as production at Escondida slowly resumes and the economy benefits from stronger growth in major regional trading partners and an expansive monetary policy. However, the expansion will remain mediocre, with public consumption growth curtailed this year by the government’s attempts to close the fiscal gap and investment remaining fairly sickly as a result of a weak construction sector.
The mining sector will inevitably have a strong impact on growth going forward. Although its importance has waned in recent years, mining still accounts for around 8% of GDP and half of exports, making it a vital source of foreign currency and government revenue. According to Maria del Pilar, Senior Economist at the Santiago Chamber of Commerce (CCS), “the development of the sector over the next few years could be less linked to the price cycle and more related to greater output, thanks to productivity improvements and a streamlining of costs. This will require more investment in technology and more prospection.”
The potential growth rate has fallen sharply since 2012 to between 2.5% and 3.0%, according to the Central Bank. With growth last year just over half that, Chile desperately needs to recover some of its former dynamism, which saw it surge to become one of Latin America’s wealthiest nations in GDP per capita terms. One immediate task it to boost the confidence of firms and households, in order to stoke domestic demand. Looking further ahead, Maria del Pilar comments, “I see five major fields of action: improving productivity, focusing on areas in which the country has a competitive advantage, strengthening the fragile cycle of physical capital investment, taking bold steps to improve the quality of education, deepening the insertion into global supply chains of value-added products and using public policies to foment the initial strength that innovation has shown in Chile.”
Author: Oliver Reynolds, Economist