Chile's GDP posts largest quarterly drop in over 2 years as recession fears grow

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By Fabian Cambero and Gabriel Araujo

SANTIAGO (Reuters) -Chile's economy shrank in the third quarter at the fastest quarterly rate in more than two years, declining further after a rapid post-pandemic recovery as recession concerns grow in the world's largest copper producer.

Gross domestic product (GDP) contracted 1.2% from the second quarter, central bank data showed on Friday, its largest decrease since the second quarter of 2020, when the economy dropped 13% as the COVID-19 pandemic hit the Andean country.

Economists polled by Reuters had expected a 1.0% fall.

Chile's economy recovered rapidly from the pandemic-related downturn but was then hit by soaring inflation, leading the central bank to hike interest rates aggressively to the current 11.25%.

"The economy is shrinking, and the near-term outlook remains negative," Pantheon Macroeconomics' economist Andres Abadia said, mentioning tighter fiscal and monetary policy, elevated political uncertainty, weakening external conditions, high inflation and problems in key industries.

The central bank said that the quarterly drop came on the back of worsening personal services and mining figures, as copper production and exports have been decreasing in recent months.

The contraction "was even steeper than expected and we think that the downturn has further to run," Capital Economics' Kimberley Sperrfechter said, forecasting Chile's economy to contract by 1.3% over 2023 as a whole.

Improvements ahead might come from falling consumer prices and higher government spending, as President Gabriel Boric said he would propose increasing public spending by 4.2% in 2023 in an effort to boost the economy.

In October, Chile's inflation slowed to its lowest in eight months - though still far above the central bank's target, it was a positive surprise reinforcing that the monetary tightening had likely come to an end, leading some economists to call for an easing cycle to start in early 2023.

On a yearly basis, according to the central bank, Chile's economy expanded 0.3% in the third quarter, slightly above expectations of a 0.2% increase.

Domestic demand, however, dropped 1.5%.

"Activities posted results offsetting each other," the central bank said in a report, noting that there was services growth driven by personal services and transportation but drops in trade and mining.