Chile's economy up for 2nd straight quarter but recovery still falters

Chile's economy grew for the second quarter in a row in early 2023 but failed to impress market participants as recovery in the world's largest copper producer appears to remain hesitant. Gross domestic product rose 0.8% in the first quarter from the previous three-month period, the central bank said on Thursday, up from a small 0.1% expansion a quarter before but below market consensus, as economists polled by Reuters expected a 1% increase.

Chile's economy grew for the second quarter in a row in early 2023 but failed to impress market participants as recovery in the world's largest copper producer appears to remain hesitant.

Gross domestic product rose 0.8% in the first quarter from the previous three-month period, the central bank said on Thursday, up from a small 0.1% expansion a quarter before but below market consensus, as economists polled by Reuters expected a 1% increase. Chile faced a slowdown last year after recovering rapidly from the COVID-19 pandemic downturn, which drove inflation higher and forced the central bank to put in place aggressive monetary tightening.

The recent economic gains broke a streak of three quarter-on-quarter declines seen in 2022, but are unlikely to drive continuous growth. "The headline figure masks signs of pronounced weakness," Capital Economics' emerging markets economist Kimberley Sperrfechter said. "We expect the economy to struggle over the coming quarters amid tight monetary policy and project a 0.3% contraction over 2023 as a whole."

The central bank itself still sees high consumer prices hindering "sustainable" growth in the Andean country in the near term, having forecast this year's gross domestic product to grow 0.5% in the most optimistic scenario. The lower-end of its outlook for 2023 stands at a 0.5% contraction, while in the next year GDP would expand 1% to 2%, less than previously forecast, according to projections released last month.

Underscoring the challenges, the Chilean economy shrunk 0.6% on a yearly basis in the first three months of 2023, according to central bank data. That was, nonetheless, better than the 0.9% contraction expected by economists in a Reuters poll.

The drop was driven by falling internal demand, which slipped 8.0% in the period due to lower investments and consumption, the central bank said in a statement, even as net exports increased. "Activities posted mixed results," the bank said. "Commerce and the agricultural and forestry sectors were the ones with greater downward influence, while personal services posted the main upward contribution."

It was "a decent Q1, but output is weakening on a sequential basis," said Pantheon Macroeconomics' Andres Abadia, noting that activity has been more resilient than initially expected but tight financial conditions were starting to bite. The central bank held interest rates at a cycle-high of 11.25% earlier this month, but market participants see room for cuts ahead, projecting the benchmark rate to fall to 9.75% within five months.

Lower rates are likely to help growth momentum to gather speed further ahead but risks remain tilted to the downside, Abadia said, forecasting "a slowdown in Q2 and relatively sluggish performance in H2" with GDP growth of 0.5% this year.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)