Investment boosts Chile GDP

Chile's economy expanded a bigger-than-expected 4.3 percent in the second quarter, speeding up from the first quarter thanks to surging investment and domestic demand, the central bank said on Monday. The figure was above the median estimates of a Reuters poll for 3.9 percent growth. In the first quarter, Chile's GDP expanded 3.3 percent compared with a year earlier, according to revised figures.
However, second quarter growth was sharply below the 6.2 percent expansion in annual gross domestic product in the same quarter last year. Construction, communications, fishing, agriculture and forestry were the most dynamic sectors, the central bank said, while the linchpin mining sector, electricity, gas and water all contracted.
Domestic demand grew 11 percent during the quarter - its highest in three years - putting more pressure on a central bank that has already raised benchmark interest rates to the highest levels in around a decade to fight inflation running at 14-year highs.
"The reading is that domestic demand is holding up well, almost too well because you do have these inflationary pressures. You do have to mitigate those pressures with a certain slowdown in domestic demand and you're just not seeing it," said Rafael de la Fuente, chief economist for Latin America at BNP Paribas in New York.
"I think the central bank has to be sensitive to that, even though much of it is coming from investment, which is the good news," he added. "We think the central bank has to continue hiking rates. Given the price dynamics you have there, it's a given. But this strength of domestic demand suggests that some further action will be needed as well."
The central bank this month raised the target overnight lending rate by 50 basis points, as expected, to an almost 10-year high of 7.75 percent. It was the third such increase in as many months. Market consensus has been that rates will end the year at around 8.0 percent. De la Fuente is expecting to see them at 8.25 percent.
The government last month lowered its forecast for economic growth this year to 4.2 percent from a previous estimate of 5.3 percent, amid higher inflation and lower output.
The central bank also reported Chile's current account deficit was $1.315 billion in the second quarter, equivalent to 2.7 percent of GDP. That compared to a surplus of $1.201 billion in the first quarter of the year. "This was due mainly to a smaller trade surplus, and to a lesser extent to an increased deficit in services," the central bank said in a statement.