Chile’s Economy Contracts as Investment Boom in Mining Fades

Chile´s economy surprised analysts by contracting in the fourth quarter as investment in the mining industry declined.

Gross domestic product shrank 0.1 percent from the previous three months, the central bank said on its website today, compared with median forecast of eight analysts polled by Bloomberg for growth of 0.28 percent. GDP expanded 2.7 percent from the year earlier, the slowest pace in almost four years, and 4.1 percent in the full year. Third quarter growth was revised to 5 percent from 4.7 percent.

The central bank cited weaker-than-expected demand in the economy when it cut the benchmark interest rate to 4 percent on March 13, the fourth reduction in six months. The economy is slowing as an investment boom in the copper industry comes to an end amid rising costs and falling prices. Chile is the world’s largest producer of the metal.

“Our first challenge is to revive or to give greater dynamism to the economy,” Finance Minister Alberto Arenas said an an event in Santiago today. “Economic growth is the basis for confronting inequality,” he said, one week after assuming office.

The yield on Chile’s 10-year bond in pesos was unchanged today at 5.02 percent. The yield on Chile’s 10-year inflation-adjusted bond was also unchanged at 1.95 percent, after reaching a record-low 1.94 percent March 14.

Investment Slump

Investment fell 12.3 percent in the fourth quarter from the year earlier, while consumer demand increased 4.6 percent. Investment had grown 10.2 percent in the second quarter and 8.2 percent in the first.

“Investment was the worst aspect, remaining flat in the year and noting a big drop in the last quarter,” Alberto Naudon, chief economist at Banco de Credito e Inversiones, said in a note to investors.

The mining industry expanded 2.1 percent from the year earlier, the slowest pace since the first quarter of 2012, while construction grew 0.2 percent and financial services increased 3.6 percent. Manufacturing contracted 1.3 percent over the same period.

The economy should recover in the second half of the year and grow near its potential in the fourth quarter or at the beginning of 2015, Fernando Soto, an economist at Banco Bilbao Vizcaya Argentaria SA in Santiago, said before the figures were released.

Monetary Stimulus

“The effects of monetary stimulus injected since last year and cuts to come will continue to support activity in coming quarters,” Soto said.

GDP will expand 4 percent this year, surpassing the average for Latin American nations by more than one percentage point, according to analysts polled by Bloomberg.

The current account deficit, the broadest measure of the trade in goods and services, narrowed to $2.43 billion from $2.68 billion the year earlier. As a percentage of GDP, the shortfall was 3.4 percent, compared with 5.1 percent in the previous three months.

The peso, which has declined 17 percent against the dollar in the past 12 months, slid 0.2 percent to 571.55 per dollar at 11:05 a.m. local time.

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