Chile’s Economic Outlook Takes Turn for Worse, Valdes Says

The outlook for every economic indicator forecast by Chile’s government has deteriorated this year, Finance Minister Rodrigo Valdes told lawmakers Monday.

The economy and domestic demand will grow more slowly than forecast, prices will rise faster than forecast and the fiscal deficit will be wider than forecast, he said. Moreover, any recovery will be gradual.

After a decade-long commodities boom came to an end last year, Chile’s economy is struggling to recover its former strength. Eight interest rate cuts in the year through October and a jump in fiscal spending this year have failed to revive business or consumer confidence, or revert seven consecutive quarters of declining investment in machinery and equipment.

“The economy is adapting to new external conditions,” Valdes said. “Private investment continues to be weak.”

The economy of the world’s biggest copper producer will expand 2.5 percent this year, compared with the 3.6 percent estimated in the 2015 budget, Valdes said. Inflation will average 3.9 percent over the year, above the previous estimate of 3 percent.

As the growth outlook deteriorates, Valdes raised the forecast for the fiscal deficit to 3 percent of gross domestic product from 1.9 percent.

“It’s imperative to progress in narrowing what will be a bigger fiscal deficit,” Valdes said. “This must be done gradually given the economic cycle, with advances year by year.”

Downbeat Tone

The deficit reflects the fiscal stimulus provided by the government this year and smaller-than-expected revenue, Valdes said.

Any pick-up in economic expansion will be gradual and requires greater dialogue with the business community and improved business and consumer confidence, Valdes said.

The downbeat tone was expected by analysts. The central bank cut its growth estimate for the year on June 3 to between 2.25 percent and 3.25 percent, from a previous estimate of 2.5 percent to 3.5 percent and from 4 percent to 5 percent estimated in September 2013.

Chile’s Imacec index, a proxy for GDP, rose 0.8 percent in May from the year earlier, less than forecast by all 21 analysts surveyed by Bloomberg, the central bank reported Monday.

In its June report, the bank warned fiscal and monetary policy had done their job, saying business confidence needed to improve to sustain the recovery. Monetary policy will remain “significantly expansive,” policy makers said in their quarterly monetary policy report.

Fiscal Revenue

Valdes forecast that fiscal spending would rise 8.8 percent this year from what the government was budgeted to spend in 2014. That compares with the Finance Ministry’s previous estimate of 9.8 percent.

Fiscal revenue will rise 2.4 percent in the year, below the previous estimate of 5 percent, Valdes said. The forecast was based on average copper prices of $2.75 a pound, compared with the previous forecast of $3.12.

As growth slows, unemployment unexpectedly rose to 6.6 percent in the three months through May from 6.1 percent the month before, the National Statistics Institute said June 30. In the month, manufacturing slid 3.3 percent from the year earlier, while retail sales gained 3.1 percent.

Growth in the world´s largest copper producer will accelerate to 2.7 percent this year, exceeding the Latin American average by more than 2 percentage points, according to economists surveyed by Bloomberg.

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