The Chilean economy suffers a contraction of 0.6% and faces significant challenges.

The Chilean economy is facing a critical moment, having reported a contraction of 0.6% in gross domestic product (GDP) in the second quarter of this year compared to the previous quarter. This decline marks the first drop in a year and aligns with projections made by analysts surveyed by Bloomberg. Although the GDP expanded by 1.6% year-on-year, the hit to investment has raised concerns among economists and government officials. The Central Bank of Chile has expressed its unease regarding this slowdown, interrupting the monetary easing cycle it had begun in an attempt to balance inflationary pressures that could affect the short term. Long-term interest rates, which have remained at high levels, along with weakness in the labor market, are contributing to a slowdown in demand from both consumers and businesses. The Chilean government has had to adjust its economic growth projections, lowering them from 2.7% to 2.6% for this year. Economists at the Central Bank are even more cautious, anticipating an expansion of 2.3%, an indicator that reflects the fragility of the economic recovery in an uncertain global scenario. Minutes from the July monetary policy meeting highlighted slower-than-expected activity during the April to June period. A determining factor in the economic contraction has been the drop in investment, which plummeted by 8.7%. The state-owned copper company Codelco has suffered a decline in its production, attributed to disruptions in mining operations and delays in expansion projects, negatively impacting the performance of the mining sector, crucial for the Chilean economy. This context is further exacerbated by the drop in copper prices, which have fallen from over $5 per pound in May to just over $4. Despite these challenges, there are reasons for optimism. The Central Bank has cut the benchmark rate by 5.5 percentage points over the past 12 months, which could provide a boost to economic activity in the future. Additionally, the economy is expected to benefit from large-scale investments in the mining sector, a fundamental pillar for sustainable growth in Chile. Projections for the second quarter of 2024 suggest that the country could experience a slight rebound, thanks to mining activity, electricity generation, and trade. However, the 1.4% decline in domestic demand, which translates into lower investment, is an element that cannot be ignored. At the same time, mining activity showed a growth of 5.5%, driven by the commissioning of new plants and improvements in copper production. In the industrial sector, some areas have experienced modest growth, such as the manufacturing of chemical products, oil, rubber, plastic, as well as pulp and paper, which recorded an increase of 0.6%. Likewise, engineering works in the construction sector have also contributed with a 1.5% increase, indicating that while the situation is concerning, there are areas of the economy showing signs of life. A positive milestone in this uncertain landscape has been the growth of the electricity, gas, water, and waste management supply sector, which surged by 21.9%, primarily driven by electricity generation. This increase underscores the need for diversification and modernization in the country's economic sectors. Chile has faced significant challenges since the pandemic, with explosive GDP growth of 11.7% in 2021, followed by a slowdown that closed 2022 with an increase of 2.4%. With inflation under control, projected to close at 3.9% for 2023, the primary goal for the country is to recover the path of sustainable growth after having avoided an economic contraction that year. The Chilean government has taken action by establishing a "Cabinet for Economic Growth" that brings together several ministers. This body aims to promote and accelerate both public and private investment projects, with special attention to key sectors such as mining and construction, essential for economic reactivation. In this context, the Chilean economy finds itself at a crossroads. The country’s ability to adapt to current challenges and seize growth opportunities will be crucial for its future. The actions taken in the coming months will be vital in guiding Chile towards a trajectory of recovery and economic stability.