(Bloomberg) -- Chile’s economic activity unexpectedly contracted in August on a decline in services, corroborating the central bank’s message that more interest rate cuts are on the way.
The Imacec index, a proxy for gross domestic product, fell 0.2% on the month, matching the worst estimate in a Bloomberg survey of analysts that had a median forecast of 0.3% growth. From the year earlier, activity gained 2.3%, the central bank reported Tuesday.
Central bankers led by Rosanna Costa cut interest rates last month for a ninth time in just over a year, while indicating further monetary easing to come. The latest reduction came after GDP contracted in the second quarter and as unemployment rises and business confidence remains below pre-pandemic levels. The government still sees the economy expanding 2.6% in 2024.
Services declined 0.6% on the month in August, the central bank reported, attributing that drop in part to the suspension of school classes because of bad weather. Industry fell by 0.8% during the period.
“Overall, this report indicates that activity in key sectors remains under strain,” Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a note.
On the other hand, commerce increased 0.7% on the back of retail gains, and mining activity jumped 2.3%.
The economic activity figures came a day after the national statistics institute reported that August marked Chile’s best month of copper output this year.
What Bloomberg Economics Says
Third quarter GDP “will likely come in above central bank estimates — with a positive output gap, contrary to policymakers’ expectations.”
— Felipe Hernandez, Latin America economist
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The year-on-year activity increase would have been closer to 3% in the absence of drags including a temporary work stoppage at the Escondida mine and electricity cuts due to bad weather, Finance Minister Mario Marcel told lawmakers later on Tuesday. The economy is on track to expand in the third quarter and to reach the government’s growth estimate for 2024, he said.
Policymakers lowered borrowing costs by a quarter-point to 5.5% in September and said rates will fall to a neutral level — which neither stimulates nor restricts the economy — faster than previously expected. Weaker demand and anchored inflation forecasts have softened the price pressure from rising electricity tariffs, board members wrote in the minutes to that decision.
Economists and traders surveyed by the monetary authority expect quarter-point rate cuts at both the bank’s October and December policy meetings.
This week, Chile President Gabriel Boric presented the government’s 2025 budget proposal, which calls for a 2.7% spending increase, with the emphasis on public security. The administration expects to have $1.2 billion in additional funds next year after Congress passed legislation against tax evasion.
--With assistance from Giovanna Serafim.
(Updates with finance minister comments in eighth paragraph)
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