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Chile GDP (Q2)

Chile’s economy merely stagnated in Q2 and the chances are high that it will fall into recession over the second half of the year. Meanwhile, current account risks are continuing to build – with the deficit widening to more than 8% of GDP in Q2 – which will keep the peso on the backfoot.

Disappointing Q2 likely followed by recession

  • Chile’s economy merely stagnated in Q2 and the chances are high that it will fall into recession over the second half of the year. Meanwhile, current account risks are continuing to build – with the deficit widening to more than 8% of GDP in Q2 – which will keep the peso on the backfoot.
  • After a weak start to the year – the economy contracted in Q1 – Chile’s economy stagnated in Q2. The outturn was below both our own and the Refinitiv consensus forecasts (for growth of 0.2% and 0.3% respectively). In year-on-year terms, growth slowed from 7.2% y/y in Q1 to 5.4% last quarter. The data imply that the economy was still operating above its pre-pandemic trend in Q2.
  • The expenditure breakdown showed that the disappointing outcome was driven by weak domestic demand. Private consumption fell sharply as high inflation started to take its toll. There were big drops in fixed investment and government consumption too. (See Table 1.) The weakness in domestic demand also pulled imports lower, by 1.3% q/q, while exports expanded by 1.6% q/q
  • We expect the economy to continue to struggle over the coming quarters. Surging inflation – the headline rate rose to a multi-decade high of 12.5% in July – will continue to weigh on consumer spending while tight monetary and fiscal policy will hit domestic demand more broadly. These factors, alongside lower copper prices, are likely to push the economy into a recession over the second half of this year. This would imply that the economy falls back below its pre-pandemic trend. (See Chart 1.)
  • Overall, given the strong carryover from last year, we expect the economy to record above-consensus growth of 2.5% over 2022 as a whole. But a weak carryover into next year will result in below-consensus growth of just 0.5% in 2023.
  • Meanwhile, current account risks are continuing to build – the current account deficit widened to a whopping 8.3% of GDP in Q2. (See Chart 2.) This was driven mainly by a deterioration of the trade deficit, which partly reflects the increase in Chile’s energy import bills following the war in Ukraine. The fragile external position makes the peso particularly vulnerable to a renewed souring of investor risk sentiment. Indeed, we expect the currency to weaken to 950/$ by the end of the year, from 914/$ now.

Chart 1: GDP

Chart 2: Current Account Balance (% of GDP, 4Q Sum)

Sources: Refinitiv, BCCh Capital Economics

Table 1: Chile GDP by Expenditure

 

Headline

Private Cons.

Investment

Govt Cons.

Exports

Imports

 

% q/q (% y/y)

% q/q (% y/y)

% q/q (% y/y)

% q/q (% y/y)

% q/q (% y/y)

% q/q (% y/y)

Q3 2021

4.4 (17.2)

10.3 (27.5)

14.9 (29.7)

0.7 (8.7)

-3.1 (1.1)

6.0 (37.3)

Q4 2021

1.7 (12.0)

-0.6 (16.1)

1.2 (19.9)

4.1 (11.0)

1.7 (0.6)

7.2 (38.4)

Q1 2022

-0.6 (7.4)

0.4 (14.0)

-7.0 (7.3)

6.4 (11.2)

-0.1 (-1.7)

-1.0 (15.3)

Q2 2022

0.0 (5.4)

-2.4 (7.7)

-1.0 (7.3)

-3.0 (6.8)

1.6 (-0.3)

-1.3 (10.9)

Sources: Refinitiv, Central Bank of Chile


Kimberley Sperrfechter, Latin America Economist, +44 (0)20 7808 4072, kimberley.sperrfechter@capitaleconomics.com

Kimberley Sperrfechter Assistant Emerging Markets Economist
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