The Chilean economy faces GDP contraction in the second quarter of 2023.

The Chilean economy has faced a significant setback in the second quarter of the year, marking a contraction in Gross Domestic Product (GDP) of 0.6% compared to the previous three months. This decline occurs for the first time in a year and aligns with market expectations, which had projected a drop in economic activity. Although, on an annual basis, the Chilean economy continues to show an expansion of 1.6%, this figure reflects a context of vulnerability, particularly due to a notable decrease in investment. The report from the Central Bank of Chile, which released these data on Monday, indicates that annual growth was below the 3.5% achieved in the first quarter. Despite this setback, analysts remain cautious, acknowledging that the outcome falls within what the market had anticipated. However, the impact of the decline in investment is evident and is raising concerns about the sustainability of future growth. In an attempt to address these pressures, the Central Bank decided to halt the monetary easing cycle it had maintained in recent months. Monetary authorities have identified short-term inflation as a troubling factor that must be weighed against the slowdown in economic recovery. This context has led traders to speculate about the possibility of new interest rate cuts, with expectations of two additional adjustments of a quarter percentage point before the end of the year. The Chilean government has also made adjustments to its growth projections, lowering its expectation from 2.7% to 2.6% for this year. Concurrently, economists consulted by the Central Bank have revised their expectations downward, anticipating growth of 2.3%, reflecting a climate of uncertainty and the need to rethink strategies to stimulate the economy. The situation is further complicated by weakness in the labor market and high long-term interest rates, which are limiting the spending capacity of both consumers and businesses. A 1.4% decrease in domestic demand is observed, driven by an 8.7% drop in investment, posing an additional challenge for economic authorities. The mining sector, vital for the Chilean economy, has not been immune to these problems. The state-owned company Codelco reported a decline in production during the first half of the year due to interruptions in mining operations and delays in expansion projects that have suffered from years of lack of investment. This context is worsened by the recent drop in copper prices, which have fallen from over $5 per pound in May to just over $4 currently, directly affecting the profitability and investment in the sector. Despite these challenges, there are reasons for optimism. Monetary easing and a potential increase in large-scale investments, especially in the mining sector, are expected to provide a boost to economic activity. The Central Bank has indicated that mining activity, as well as electricity generation, trade, and transportation, have shown slight growth, which could signal a gradual recovery. The performance of the manufacturing industry has also had some positive aspects, with a 0.6% increase driven by the production of chemicals, oil, rubber, and plastics, as well as cellulose and paper. The construction sector has shown a 1.5% increase, particularly in engineering works, suggesting that some areas of the economy are faring better than others. The current situation of the Chilean economy reflects the challenges facing not only the country but also the region as a whole. After experiencing a significant boom following the pandemic, with a historic growth of 11.7% in 2021, the country now finds itself at a crossroads. The recovery from the contraction expected by the end of 2023, where growth is estimated to be just 0.2%, will largely depend on the government's and economic authorities' ability to implement strategies that stimulate investment and market confidence. The government has taken measures by creating an "Economic Growth Cabinet," which aims to accelerate investment projects and strengthen key sectors such as mining and construction. While this effort is a step in the right direction, it will require a coordinated and sustained approach to address the roots of the slowdown and ensure that the Chilean economy can recover robustly and sustainably in the coming years.