Chile's Economy Resumes Growth as Government Spending Jumps

Updated on
  • GDP grew 0.4% in third quarter from the previous three months
  • Growth had stalled in second quarter on declining investment

Chile’s economy resumed growth in the third quarter, after stagnating in the previous three months, aided by increased government spending and investment.

Gross domestic product expanded 0.4 percent from the previous quarter, the central bank said on its website Wednesday, compared with the 0.3 percent medium estimate of 12 economists surveyed by Bloomberg. From the year earlier, GDP grew 2.2 percent, up from 1.9 percent in the second quarter.

The government has stepped up spending this year, while the central bank kept its key rate at a five-year low until October, as policy makers look to revive growth in the face of slumping commodity prices. The policy has had some success, with investment in machinery and equipment rising for the first time in at least seven quarters in the past three months. Now, the government is warning that fiscal spending growth will slow next year and the central bank has started to raise rates.

“The high dynamism in investment was a surprise, in particular the component that was more depressed, machinery and equipment,” said Nathan Pincheira, an economist at Banchile Inversiones in Santiago. “It is still too soon to celebrate.”

Total investment rose 7.1 percent in the third quarter from the year earlier, with investment in machinery and equipment jumping 12.2 percent. Government spending rose 5.9 percent over the same period, while exports fell 0.9 percent.

As domestic demand picked up and exports declined, the current account slipped back into deficit for the first time in three quarters. The shortfall totaled $2.6 billion, or 4.6 percent of GDP, the central bank said in a separate report.

Chile economy is expected to expand 2.2 percent this year, according to analysts surveyed by Bloomberg. That compares with the 0.5 percent contraction expected for Latin America as a whole.

Still, analysts have reduced their forecast for growth next year to 2.3 percent from 3.5 percent in May, according to monthly surveys by the central bank.

The central bank raised its key rate a quarter point to 3.25 percent in October as it tries to pull inflation back within the target range. Bank President Rodrigo Vergara has said rates will probably rise once or twice more over the next 10 months. Still, monetary policy will remain expansionary, he said, with the key rate staying below the 4.5 percent to 5 percent neutral range.

“The recovery is still sluggish and not showing any signs of sustainability,” said Andres Abadia, a senior economist at Newcastle-based Pantheon Macroeconomics Ltd. “Even if the economy bottomed out in the second quarter, investment will continue to be a drag and we expect a very modest acceleration during coming quarters.”

(Updates with analyst comment in fourth paragraph, investment growth in fifth.)
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