Chile Faces Recession as Mining Collapse Triggers Five-Month Contraction

The Chilean economy on Wednesday completed five consecutive months of declining activity, a streak unseen since the 2009 subprime crisis and one that places the country a step away from a technical recession, as financial markets, the political establishment, and the private sector wrestle over the magnitude and urgency of the response.

The Central Bank reported that the Imacec contracted 0.9% year-on-year in May, dragged down primarily by mining, whose output collapsed 11.6% annually and single-handedly subtracted 1.5 percentage points from the indicator. Manufacturing also gave up 1.7%. With this result, the cumulative average from January to May stands at -0.7%, a performance whose only historical precedents are 1999, during the Asian crisis, and 2009. Hermann González, macroeconomic coordinator at Clapes UC, was blunt about it: "This year, unfortunately, is going to end with growth between 1% and 1.5%." Scotiabank warned that if the June Imacec contracts 0.5% month-on-month in seasonally adjusted terms, a technical recession would be confirmed beyond dispute, though its microdata point to a month with "somewhat greater dynamism."

Financial markets responded swiftly. The IPSA closed lower at 10,812.21 points, breaking a three-session winning streak, on weak turnover of barely $110.8 billion, roughly a third of it concentrated in Latam and SQM. The dollar climbed to three-month highs, touching $925, even as the copper price hovered around US$6 per pound. Pressure on the peso reflects a confluence of factors: foreign agents reinforced their net short position against the local currency by US$2.3 billion last week, and the new Federal Reserve chair, Kevin Warsh, surprised at the Sintra Forum by announcing that he would stop providing forward guidance on the path of rates, pushing the dollar higher globally. For Andrés Pérez, chief economist at Itaú Chile, non-resident positioning against the peso is at record levels, combining the renewed strength of the dollar with expectations of even tighter rate differentials between the United States and Chile.

That backdrop opens the door, precisely, to a local monetary easing. González argued that two rate cuts between now and year-end "are compatible with the cyclical situation of the economy," a signal the market reads as technical endorsement for the Central Bank to act more expeditiously. Economists from a range of institutions, including the Instituto Libertad and Universidad de los Andes, agreed that the economy is entering a recessionary phase and that the monetary policy adjustment is insufficient unless accompanied by concrete fiscal measures beyond the sweeping reform currently in the legislative pipeline.

That mega-reform, in turn, was the setting for a notable political shift. Finance Minister Jorge Quiroz, who had systematically resisted convening a broad negotiating table, finally agreed to take part in a meeting at the Congress headquarters in Santiago called by the president of the Senate, Paulina Núñez. The gathering, which ran nearly three hours, was described by Núñez as a genuine exercise in politics: "opening spaces for conversation and listening to each other." One factor accelerating the minister's shift was the judicial situation of Senator Miguel Ángel Calisto, whose potential loss of parliamentary immunity would subtract an allied vote from the government at critical moments. President Kast, on a tour of Paraguay where he signed bilateral agreements on tax and security matters with his counterpart Santiago Peña, acknowledged his concern over the Imacec decline and the rise in unemployment: "We realized too late that we have an economic illness."

The labor market compounds the diagnosis. The unemployment rate settled at 9.4% nationally, with 981,315 people out of work, while youth unemployment reached 22.8% in the February-April quarter, the highest figure for that period since the comparable series began. Formal salaried employment is down 1.7%, pushing growing segments of the labor force into informality, which now encompasses 27% of the employed. SOFOFA, whose president proposed in her annual address the creation of 500,000 jobs through a training, flexibility, and investment agenda, published a study estimating that a four-percentage-point cut in the corporate tax rate—from 27% to 23%—could generate more than 80,000 additional direct jobs and up to 210,000 over four years.

In the sector that weighs most heavily on activity, the news is mixed. Codelco acknowledged in an internal report that it had lost its leadership as the world's largest copper producer, with costs 57% above those of its competitors and substantially lower profitability. The state company also faces an institutional dispute with the Contraloría General de la República, which it accused of imposing a "completely unprecedented" requirement by subjecting the creation of subsidiaries to prior legal review, a requirement Codelco rejects as an infringement on its corporate nature and economic freedom. However, the flow of private investment into the mining sector offers a meaningful counterweight: BHP filed the environmental impact study to restart Cerro Colorado with a US$1.5 billion investment projected to yield 130,000 tons of copper cathodes per year and up to 3,000 operational jobs; the Polish-Australian consortium KGHM and South32 confirmed US$725 million to expand Sierra Gorda with a fourth grinding line that would lift output by as much as 20%; and PwC's Global Mine report warns that the world's 40 largest miners are accumulating cash without translating it into higher production, foreshadowing a wave of mergers and acquisitions.

In the energy sector, Trafigura entered the Chilean electricity market by acquiring, together with Generadora Metropolitana, the 273 MW Los Guindos plant, which is being converted from diesel to natural gas. Spain's Grenergy, meanwhile, tendered 1.5 TWh in 20 GWh blocks through its subsidiary GR Power, with supply projected from 2028 and contracts of up to 15 years. On the external trade front, the foreign minister will travel to Washington and Mexico to meet with representatives of the Department of Commerce and the private sector amid the reactivation of the tariff threat from the U.S. administration, an initiative that takes on added urgency in a context where speculative positioning against the peso has already reached historic levels.

What remains decisive over the coming weeks is manifold: the June Imacec print, which will determine whether Chile formally enters technical recession; the Central Bank's decisions at its upcoming