Chile Expands at Slowest Pace in Four Years

Gross domestic product expanded 2.6 percent from a year earlier, the central bank said on its website today, co...

Gross domestic product expanded 2.6 percent from a year earlier, the central bank said on its website today, compared with 2.7 percent in the fourth quarter. GDP grew 0.7 percent in the first quarter from the previous three months.

Growth is slowing in the world_s largest copper producer as the price of the metal fell to a four-year low. The deceleration comes as President Michelle Bachelet proposes tax increases to fund more social spending and Finance Minister Alberto Arenas says the budget deficit may be wider than initially forecast because of a drop in revenue.

_We are expecting growth to reach 2.9 percent in 2014 and in order to reach that target, economic activity should start accelerating from April on,_ said Marcos Buscaglia, the chief Latin American economist at Bank of America Corp in New York. _It seems the worst is behind._

Central bank President Rodrigo Vergara said last month that economic growth will start to accelerate in the second half. Policy makers cut the benchmark interest rate four times in the past eight months as growth slowed.

They left the rate unchanged at 4 percent for a second month last week after the inflation rate rose to a five-year high in April, limiting the room to stimulate growth. Prices climbed 4.3 percent from the year earlier, above the 2 percent to 4 percent target range for the first time since February 2012.

More Stimulus

_It is clear that the economy needs more stimulus, what isn_t is when and how much,_ said Fernando Soto, an economist at Banco Bilbao Vizcaya Argentaria SA in Santiago. BBVA forecasts policy makers will reduce the key rate to 3.25 percent by year-end.

Analysts say they expect policy makers to resume rate cuts in June, forecasting that inflation will slow to about 3.1 percent in 11 months, according to a central bank survey released May 12.

Investment fell 5 percent in the first quarter from the year earlier, while consumer demand increased 3.7 percent, the central bank said. Investment had fallen 12.3 percent in the fourth quarter.

Chile_s growth in the first quarter over a year earlier was in line with the 2.4 percent median forecast of 14 analysts surveyed by Bloomberg.

World Recovery

Imports of capital goods fell 30 percent in April from a year earlier, indicating weak growth persisted in the second quarter. The decline was led by a 52 percent slump in imports of machinery for mining and construction.

As the world economy rebounds, growth in the South American country will accelerate toward the end of the year, said Nathan Pincheira, an economist at Banchile Inversiones in Santiago. GDP will expand 3.6 percent this year, surpassing the average of Latin American nations by more than one percentage point, according to analysts polled by Bloomberg.

_We expect growth to start rallying in the fourth quarter, led by a pick-up in investment and a dynamic external sector,_ Pincheira said

Copper for delivery in three months rose 0.9 percent to $6,925 a metric ton on the London Metal Exchange today, up from a four-year low of $6,415 on March 13.

Mining companies from Anglo American Plc. to Teck Resources Ltd. have postponed $43 billion of projects in Chile as they weigh rising costs and declining copper prices, according to the National Mining Society, an industry lobby group.

Weaker Peso

Chile_s peso has weakened 5.5 percent against the dollar in the past six months, the worst performing emerging market currency after the Argentine peso. The benchmark IPSA stock index has gained 4.3 percent over the same period.

Manufacturing (CHIPMFGY) has contracted in eight of the past 12 months, while retail sales rose 5.2 percent in March from the year earlier, the slowest pace since the recession of 2009.

The jobless rate rose to 6.5 percent in the first quarter from 5.7 percent in the last three months of 2013 and 6.2 percent in the year-earlier period, the statistics agency said April 30.

Bachelet presented to Congress a proposal to boost corporate taxes to 25 percent from 20 percent by 2017 as part of a plan to increase federal revenue by $8.2 billion. The additional money would be used to fund free education for all and improve health services without widening the budget gap, forecast at 0.9% of GDP this year.

The government is _going to struggle to meet social demands if growth doesn_t pick up,_ as expected, Pincheira said.

Bloomberg | By Javiera Quiroga and Sebastian Boyd

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