Chile’s Economy Shows Growth for the Second Consecutive Quarter, Although Recovery Remains Fragile

Chile’s economy saw growth for two consecutive quarters at the start of 2023. However, despite increasing by 0.8%, the world’s largest copper producer is still struggling to recover. The growth was up 0.1% from the previous quarter but fell short of market consensus, with economists anticipating a 1% rise. Chile experienced slowdown last year, in the aftermath of the COVID-19 pandemic. Inflation rose and central banks had to aggressively tighten monetary policy, causing economic growth to suffer. Although recent growth has broken the third consecutive quarter of negative growth seen in 2022, it is unlikely to provide significant progress.

According to Kimberly Sperfechter, an economist at Capital Economics, the headline numbers mask notable weakness. She predicts that the economy will struggle amid tight monetary policy in the next few quarters and forecasts a contraction of 0.3% in 2023 as a whole. The Organisation for Economic Co-operation and Development (OECD) sees the tight monetary policy impeding sustainable growth in the Andean countries. Under the most optimistic scenario, the GDP will grow by 0.5% this year. The lower end of the 2023 outlook is a 0.5% contraction, with next year’s GDP expected to expand by 1% to 2%, below earlier forecasts.

Chile’s economy contracted at an annual rate of 0.6% in the first three months of 2023, according to central bank data. However, this was better than the 0.9% contraction expected. Weak domestic demand was the main driver of the decline, with lower investment and consumption despite an increase in net exports. The central bank reported that the economy was showing mixed results, with personal services having the highest upside and commercial and agriculture having the biggest downside.

Although economic activity was more resilient than initially expected, the tightening of financial conditions was starting to take effect. Earlier this month, the central bank kept rates unchanged at a cycle high of 11.25%, but market participants see room for further rate cuts. Thus, Abadiah anticipates the base rate will decrease, and lower interest rates will spur growth momentum. Although further acceleration is likely, risks remain skewed to the downside, and GDP growth will experience a slowdown in the second quarter and relatively weak performance in the second half of 2023.

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