Chile's Economy: Technical Recession Fears Mask Deeper Issues

Chile's economic activity indicator for May, showing a 0.9% year-on-year decline, has reignited concerns about a technical recession. The presidency has described this as an "economic illness," while political factions debate responsibility. However, the current discussion conflates distinct economic phenomena, leading to an incomplete diagnosis. Data from the Central Bank reveals a bifurcated economy: the overall decline is largely driven by the mining sector. Excluding mining, the non-mining economic activity actually grew by 0.7% year-on-year. In seasonally adjusted terms, this non-mining sector increased by 1.0% compared to the previous year, though it saw a monthly decrease of 0.3% from April. This indicates some underlying economic traction outside of mining, albeit still weak. The total economic index remains negative, primarily due to reduced copper production. Explanations for deteriorating economic expectations have also pointed to rising fuel prices in late March, following adjustments to the MEPCO mechanism and gasoline price hikes. However, this explanation warrants caution, as the mechanism did not cease operation, and fuel prices have since reverted closer to pre-conflict levels. Attributing May's stagnation solely to fuel costs overlooks the dissipating nature of the initial shock. A more significant concern lies in the labor market, with unemployment at 9.4% in March-May and informality at 27.0%. The labor force is growing faster than employment opportunities. Declaring or dismissing a technical recession based on a single month's data is unhelpful; the crucial point is that the non-mining economy has its own momentum but lacks sufficient strength to address the worsening labor market conditions. In this context, monetary policy should be central to the discussion. With a Monetary Policy Rate of 4.5%, available capacity, and more contained inflationary risks, there is room to consider further interest rate cuts. However, interest rates can support the economic cycle but cannot substitute for investment, productivity, or formal employment. Chile is not in freefall but is experiencing insufficient growth, which, if prolonged, negatively impacts employment, income, tax revenue, and confidence.