Fiscal Spending Cushions Chile’s First Contraction in 6 Yrs

Updated on
  • GDP shrank 0.4% in second quarter from previous three months
  • Contraction was less than the 0.7% forecast by economists

A jump in fiscal spending cushioned Chile’s first economic contraction in more than six years in the second quarter as mining output declines and unemployment begins to rise.

Gross domestic product fell 0.4 percent from the previous three months, the statistics agency reported on its website. The median forecast of 10 analysts surveyed by Bloomberg was for a decline of 0.7 percent. The economy expanded 1.5 percent from the year earlier, down from a revised 2.2 percent in the first three months of the year. 

Mining output is falling in the world’s largest copper producer as a slump in prices deters investment in an industry that is struggling to compensate for declining metal grades. At the same time, Chile’s unemployment is at the highest level since 2011, pushing down household spending in the second quarter for the first time in at least two years. The government has stepped up expenditure to fill in the gap.

"There has been a strong increase in government spending that more than compensated the slowdown in private spending," said Felipe Alarcon, an economist at Euroamerica. "It’s good news, but we are not out from this scenario of weak growth."

Fiscal spending rose 2.7 percent in the second quarter from the previous three months, while household expenditure dropped 0.4 percent.

“An overall soft report, but better than we expected due to the upside surprise in public spending,” Andres Abadia, an analyst at Pantheon Macroeconomics, said in a note to clients.

The economy will expand 1.6 percent in 2016, the weakest pace since the recession of 2009, according to economists surveyed by the central bank last week. The forecast has declined from 2.1 percent at the beginning of the year.

The economic downturn and weaker inflation led the central bank to remove its tightening bias on monetary policy last week, according to a statement accompanying the benchmark rate decision. Consumer prices rose 4 percent in July from the year earlier, after spending most of the past two years above the 2 percent to 4 percent target range.

“We expect the central bank to remain where it is for the rest of the year," Alarcon said. "With inflation under control, the most important risk now is the Fed; we can’t rule out a rate hike in December, and this would dissuade any attempts to cut rates here."