Chile's construction industry has prevented a slide in investment turning into a slump in the past few years amid a boom in home building. Next year will be a different story.
A drop in copper prices has pushed down investment in machinery and equipment since the end of 2012, leading to the weakest economic growth over a three-year period since the debt crisis of 1981. Now investment in construction may be about to join the downturn as one-time factors boosting home sales fade, according to Rodrigo Aravena, chief economist at Banco de Chile.
That would be bad news for the embattled administration of President Michelle Bachelet. Any decline in the construction industry could lead to higher unemployment and weaker consumer demand, pushing the government’s repeated forecasts of a revival in growth further and further into the future.
Construction boomed in 2015 as builders raced to beat the imposition of higher taxes on new homes this year. The area authorized for new construction projects reached a record high in December as Chileans rushed to buy off-the-plan apartments before the changes came into affect. Construction companies will be busy for much of this year building those properties that they have already sold. That won't be repeated next year, though.
"Construction investment has remained resilient because of one-time factors that have encouraged house sales," Aravena said. "We can’t rule out negative construction investment growth in 2017."
Don’t expect the government to come to the industry’s aid, either.
Since the 2008 financial crisis, Chile’s government has followed a counter-cyclical policy, boosting investment when economic growth was weak and lowering it during the years of the copper boom. But now, policy makers are pledging to tighten Chile's belt as the fiscal deficit widens.
The government has already cut spending plans once this year and still forecasts the second biggest fiscal gap in a quarter century. Deputy Finance Minister Alejandro Micco told Bloomberg last month that what spending growth there was in 2017 would be focused on health and education. Public works spending would be flat, he said.
Nor will the office market come to the rescue as vacancy rates rise and building slows. The only bright spot may be the power industry, with Energy Minister Maximo Pacheco last week forecasting a surge in investment in renewable energy plants.
Investment as a percentage of GDP will fall as low as 20 percent in the next two years from 23.7 percent last year and 26.6 percent in 2012, Aravena forecast. That would crimp the long-term growth potential of the economy.
"Investment growth has been falling for two years; we didn’t see anything like this during the Asian crisis, or the subprime crisis," Aravena said. "We have to assume that the fall in investment is more permanent."