Chile Reeling From Slump in Copper Prices as Economy Stalls

  • Industry contracts at fastest pace since at least 2009
  • Manufacturing tumbled 4.6% in January from the year earlier

Chile’s economy is feeling the full impact of a three-year decline in copper prices as mining output slumps, manufacturing shrinks and the government reduces spending plans to account for lower revenue.

Copper output tumbled 14 percent in January from the year earlier, leading an 8.3 percent drop in industrial production, the national statistics agency said on its website Monday. The medium estimate of six analysts polled by Bloomberg was for a drop of 3.5 percent in industrial output.

The economy took a turn for the worse in January after two years of sluggish growth as some mining companies reduced output in the face of lower prices and declining ore grades hit other mines. The drop in revenue from the copper industry led Finance Minister Rodrigo Valdes to reduce planned spending for this year by 1 percent in an attempt to bolster business confidence and crimp rising debts.

“The figures for January showed a weaker than forecast panorama, with the economy practically stalled,” Inversiones Security said in a note to clients. The slowdown could “moderate the restrictive bias” in monetary policy.

As the economy weakens, traders and analysts are scaling back their forecasts for interest rate increases this year. Traders surveyed last week by the central bank saw the key rate left unchanged at 3.5 percent in three months time, below the 3.75 percent forecast two weeks earlier.

The central bank has raised its benchmark rate by half a percentage point to 3.5 percent since October of last year.

There are few signs of the “green shoots” of recovery first seen by the government back in late 2014. Banco Bilbao Vizcaya Argentaria SA cut its 2016 growth forecast this month to 1.8 percent from 2.5 percent, and warned that risks remained on the downside.

Manufacturing slid 4.6 percent in January from the year earlier, the biggest decline since August, 2014. The one bright area of the economy is the jobs market, with the unemployment rate at 5.8 percent in the three months through January, unchanged from the prior period and defying analyst forecasts of an increase.

“Today’s data underscore the fragile nature of the economic recovery,” Capital Economics said in an e-mailed report. Still, “we remain optimistic that Chile’s economy should continue to pick-up over this year.”

Consumer spending should remain resilient to the economic slowdown and global conditions should improve, Capital Economics said. Retail sales increased 3.4 percent in January after a 1.8 percent rise the month earlier, the statistics agency said today.

Year-on-year, economic growth in Chile hasn’t exceeded 2.8 percent since the fourth quarter of 2013, a poor performance for a country where growth averaged 4.8 percent in the previous ten years.

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