Chile Economy Shrinks Despite Investor Optimism Over Kast Government

nqege2bd)ukm730[emq034r{_media_dl_1.png Chile's central bank, Bloomberg

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(Bloomberg) — Lea en español

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Chile’s economy contracted in the first quarter even as market-friendly proposals from the nation’s new President Jose Antonio Kast stoked investor optimism.

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Gross domestic product shrank 0.3% in the January-March period compared to the prior three months, more than the -0.2% median forecast from analysts in a Bloomberg survey. It dropped 0.5% from a year ago, the central bank reported Monday.

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Kast took office March 11 with pledges to propel annual GDP growth to 4% by the end of his term from current levels near 2.5% through corporate tax cuts, investment incentives and a leaner government. Still, within days, his administration let fuel prices rise the most since at least 1980 as the Middle East war made crude more expensive globally. In response, analysts pared back their estimates for economic growth this year and raised their inflation bets.

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“The broader outlook remains difficult. We continue to forecast GDP growth of around 1.5% in 2026,” Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a note. “Tighter financial conditions, still-soft external demand and labor market slack will continue to limit the recovery, even as investment gradually improves.”

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Mining activity fell 1.3% in the first quarter from the prior three months, while the rest of the economy contracted 0.1%, according to the central bank.

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Government Bill

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Kast’s administration expects the economy to grow slightly more than 2% in 2026 as it pushes pro-investment reforms and cuts spending, Finance Minister Jorge Quiroz said in an interview earlier this month. 

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A government-backed bill that include business tax reductions and employment subsidies is currently advancing through Congress, and Quiroz said he expects its core elements to be approved by June despite a divided legislature.

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There’s still plenty of weakness in Chile’s economy, which is one of the richest in Latin America. Unemployment rose more than expected in the three months through March, to 8.9%, hastened by a loss in formal jobs. Government data also showed continued weakness in industry and manufacturing that month.

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Economists surveyed by the central bank earlier in May expect Chile’s GDP to grow 2% this year, down from forecasts of 2.5% near the start of the Iran war. They also see annual inflation at 4.3% this December.

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Most recently, annual inflation sped up to 4% in April as higher fuel costs propelled the biggest monthly consumer price gain since 2022.

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Chile central bank has held borrowing costs steady at 4.5% so far this year. Policymakers’ strategy should be “revisited meeting-by-meeting” as new information comes to light, board members wrote in the minutes to their April rate decision published earlier this month.

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The first-quarter decline in GDP was hastened by a fall in both investments and exports, according to Kimberley Sperrfechter, Senior Emerging Markets Economist at Capital Economics.

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“The weak GDP reading may temper some of the more hawkish voices on the central bank, but we think policymakers will remain focused on inflation,” Sperrfechter wrote in a note. “The longer energy prices remain high, the higher the chances of the BCCh shifting toward an interest rate hike.”

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—With assistance from Giovanna Serafim.

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(Updates with economist quotes in fourth and final paragraphs)

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