Chile’s Economic Recovery Falters as GDP Contracts: What This Means for Investors

Chile’s economy took a downturn in the second quarter of 2024, marking its first quarterly contraction in a year. This 0.6% decline in GDP from the previous quarter highlights growing concerns about the country’s economic momentum, and it strengthens the argument for renewed interest rate cuts by the central bank.

According to the central bank’s report, the GDP did grow by 1.6% compared to the same period last year, but this was overshadowed by the quarterly decline. This performance aligns with the median forecast from a Bloomberg survey of analysts, suggesting that the economic recovery may be stalling. The contraction is particularly significant as it comes after a period of cautious optimism where policymakers paused rate cuts to assess inflationary pressures against ongoing economic recovery. However, the latest data shows a sharp downturn, especially in investment, which plummeted by 8.7% year-over-year, driven by high long-term interest rates. This downturn in investment, especially in sectors like vehicles and electronics, underscores the challenges the Chilean economy faces.

The mining sector, a cornerstone of Chile’s economy, saw a 1% contraction, while the broader economy also shrank by 0.6% on a quarterly basis. The slump in mining is a critical factor since this sector significantly contributes to Chile’s GDP, primarily through copper exports. The national copper company, Codelco, reported a decline in production during the first half of the year due to operational disruptions and delays in expansion projects—an outcome of years of underinvestment. Furthermore, copper prices, which play a pivotal role in Chile’s export revenue, have dropped from over $5 per pound in May to just above $4 per pound, adding to the economic strain.

Despite these challenges, there was a slight silver lining as the central bank revised the first quarter’s growth upwards to 2.1% from an earlier estimate of 1.9%. However, this upward revision does little to offset the concerns raised by the second quarter’s performance.

Economic forecasts are now more cautious. The government recently downgraded its growth forecast for 2024 to 2.6% from 2.7%. Analysts surveyed by the central bank also adjusted their expectations, predicting a 2.3% expansion, down from 2.5% just a month prior.

In the minutes from its July policy meeting, the central bank acknowledged that the April-June period showed weaker-than-expected activity. While some factors contributing to this weakness were seen as specific and temporary, overall domestic demand remained relatively stable.

Looking ahead, Chile’s economy could see some relief from monetary easing. Over the past year, the central bank has cut the benchmark interest rate by 5.5 percentage points, a move that is expected to support economic activity in the coming months. Additionally, large-scale investments, particularly in the mining sector, are projected to provide a long-term boost to the economy.

Kimberley Sperrfechter, an emerging markets economist at Capital Economics, suggested that the Q2 contraction might be a correction following a strong Q1. She anticipates a return to positive growth in the third quarter. “The weakness observed in Q2 opens the door for the central bank to implement two additional 25 basis point interest rate cuts before the year ends,” she noted in her research report.

For investors, this period presents a mixed bag of opportunities and risks. While the immediate outlook is clouded by economic slowdown and declining copper prices, the potential for further rate cuts and long-term investments, especially in the mining sector, could offer strategic entry points for those with a longer investment horizon.