Chile’s economy contracted in the first quarter, despite investors’ optimism about the pro-market proposals of the new government of José Antonio Kast.
Gross Domestic Product (GDP) fell 0.3% in the January-to-March period from the previous three months, worse than the median of -0.2% forecast by analysts in a Bloomberg survey. On a year-over-year basis, there was a 0.5% drop, the central bank said on Monday.
Kast took office on March 11 promising to lift annual GDP growth to 4% by the end of his term, from current levels near 2.5%, through corporate tax cuts, investment incentives, and trimming the public apparatus. Yet, in a few days, his government allowed the largest rise in fuel prices since at least 1980, amid the oil price surge triggered by the war in the Middle East. In response, analysts lowered growth projections for this year and raised inflation bets.
“The broader perspective remains difficult. We continue projecting GDP growth around 1.5% in 2026,” wrote in a report Andrés Abadía, chief economist for Latin America at Pantheon Macroeconomics. “Tighter financial conditions, external demand still weak, and idle slack in the labor market will continue to limit the recovery, even with the gradual improvement in investment.”
Mining activity fell 1.3% in the first quarter from the previous three months, while the rest of the economy declined 0.1%, according to the central bank.
Government Plan
Kast’s government foresees the economy growing a little above 2% in 2026, as it pushes forward with pro-investment reforms and spending cuts, said Finance Minister Jorge Quiroz in an interview earlier this month.
A bill supported by the Executive, which includes tax cuts for companies and subsidies for employment, is being considered in Congress. Quiroz said he hopes its core points will be approved by June, despite fragmentation of the parliamentary base.
The Chilean economy, one of the richest in Latin America, still shows clear signs of weakness. Unemployment rose more than expected in the quarter ended in March, to 8.9%, driven by the loss of formal jobs. Official data also pointed to continued weakness in industry and manufacturing that month.
Economists surveyed by the central bank in early May forecast GDP growth of 2% this year, below the 2.5% estimate made near the start of the war in Iran. They also see annual inflation at 4.3% in December.
More recently, year-over-year inflation accelerated to 4% in April, with the rise in fuel prices leading to the largest monthly increase in consumer prices since 2022.
The Chilean central bank kept the policy rate at 4.5% throughout this year. The central bank’s strategy should be “reassessed at each meeting” as new information emerges, board members wrote in the minutes of the April decision released this month.
The decline in GDP in the first quarter was reinforced by declines in both investment and exports, said Kimberley Sperrfechter, senior emerging markets economist at Capital Economics.
“The weak GDP reading may mute some of the more hawkish voices within the central bank, but we believe policymakers will continue to focus on inflation,” she wrote in a note. “The longer energy prices stay elevated, the greater the chances that the Chilean central bank will move toward a rate hike.”
© 2026 Bloomberg L.P.
