Chile’s economy shrank in the first quarter, despite investor optimism over the pro-market proposals of José Antonio Kast’s new government.
Gross Domestic Product (GDP) fell 0.3% in the period from January to March compared to the previous three months, worse than the median of -0.2% predicted by analysts in a Bloomberg survey. Compared to a year before, there was a drop of 0.5%, the central bank reported this Monday.
Kast assumed the presidency on March 11, promising to bring annual GDP growth to 4% by the end of his term, compared to current levels close to 2.5%, by cutting corporate taxes, stimulating investment and downsizing the public sector. Still, in just a few days, his government allowed the biggest rise in fuel prices since at least 1980, amid the rise in oil prices caused by the war in the Middle East. In response, analysts reduced growth projections for this year and raised inflation bets.
“The broader outlook remains difficult. We continue to project GDP growth of around 1.5% in 2026,” Andrés Abadía, chief economist for Latin America at Pantheon Macroeconomics, wrote in a report. “Tighter financial conditions, still weak external demand and 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 compared to the previous three months, while the rest of the economy fell 0.1%, according to the central bank.
Government project
The Kast government expects the economy to grow just above 2% in 2026 as it moves forward with pro-investment reforms and spending cuts, Finance Minister Jorge Quiroz said in an interview earlier this month.
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A bill supported by the Executive, which includes tax cuts for companies and employment subsidies, is being processed in Congress. Quiroz said he hopes his central points will be approved by June, despite the 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 polled by the central bank in early May project 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, 12-month inflation accelerated to 4% in April, with rising fuel prices leading to the biggest monthly increase in consumer prices since 2022.
Chile’s central bank has maintained the basic interest rate at 4.5% throughout this year. The monetary authority’s strategy should be “reassessed on a meeting-by-meeting basis” as new information emerges, board members wrote in the minutes of the April decision, released this month.
The drop in GDP in the first quarter was reinforced by the decline in both investment and exports, according to Kimberley Sperrfechter, senior emerging markets economist at Capital Economics.
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“The weak GDP reading may hold back some of the toughest voices within the central bank, but we believe policymakers will remain focused on inflation,” she wrote in a note. “The longer energy prices remain high, the greater the chances of the BCCh heading towards an interest rate hike.”
© 2026 Bloomberg L.P.
