Chile: The economy fires on all cylinders in Q2
August 20, 2018
The Chilean economy shifted into a higher gear in the second quarter, on the heels of an already impressive expansion at the outset of the year. GDP grew at a near six-year high of 5.3% year-on-year in Q2 (Q1: +4.3% year-on-year) on booming ex-mining activity which more than compensated for the slowdown in the mining sector amid labor disputes at Chile’s Escondida copper mine. The second quarter reading came broadly in line with market expectations and marked the fifth consecutive quarter of the quickening recovery.
The acceleration in the second quarter came entirely on the back of improved dynamics in the domestic economy. Demand rose 6.0% in annual terms in Q2, up from the previous quarter’s 4.0%, amid an impressive surge in investment activity. Thanks to solid investment in machinery and equipment, and despite nearly stagnant construction activity, fixed investment surged 7.1% annually, which was the best reading in five years (Q1: +3.1% yoy). Nevertheless, household spending remained in the driver’s seat on the domestic front and rose at an over four-year high of 4.5% annually in Q2 (Q1: +3.8% yoy), helped by buoyant services consumption and robust sales of durable goods including automobiles. Lastly, government consumption growth accelerated from 1.5% yoy in Q1 to a more solid 2.8% annually in Q2.
On the external side, soaring imports dented the external sector’s contribution to recovery in the second quarter, partially driven by elevated imports of capital goods. Against the backdrop of surging imports (Q2: +10.0% yoy; Q1 +6.1% yoy) and modestly accelerating exports (Q2: +7.5% yoy; Q1 +7.1% yoy), the external sector subtracted 0.7 percentage points from GDP growth in Q2, swinging from a 0.4 percentage points contribution recorded in the previous quarter.
Looking at the industry-level performance, the uptick in the second quarter was driven by a rock-solid performance of the non-mining economy. Non-mining GDP expanded 5.5% yoy in Q2 (Q1: +3.3%), outperforming mining GDP for the first time since Q2 2017 (Q2: +4.8% yoy; Q1 +19.1% yoy).
On a quarter-on-quarter basis, GDP expanded a seasonally-adjusted 0.7%, below Q1’s 1.2% quarter-on-quarter rise.
All-in-all, the second quarter GDP release indicates the Chilean economy is on a firm recovery path. However, the depreciation of the peso and sliding global commodity prices continue to present significant downside risks to the country’s growth prospects amid global trade war fears and the volatile geopolitical environment. Nevertheless, growth should be markedly higher this year than in 2017, largely on robust private consumption and fixed investment growth.
Author: Almanas Stanapedis, Economist