Seeking security!
Q2 national accounts reinforced the loss of momentum in activity so far in 2026. Both total and non-mining GDP remained broadly stagnant in H1. We have therefore revised our 2026 GDP growth forecast down to 0.5%. Nonetheless, we remain relatively optimistic about 2027.
High copper prices continue to provide a favorable external backdrop. The four-quarter accumulated current account moved into a surplus for the first time since Q4 2010. But higher international oil prices have also raised energy imports. The resulting income shock has arguably been the main factor behind the recent economic activity slowdown.
Labor market conditions remained weak in the April–June 2026 rolling quarter. Seasonally-adjusted employment has been broadly stagnant since mid-2025. We estimate that cyclical factors account for most of the current weakness, but higher labor costs are also likely contributing to the deterioration.
Head inflation fell to 3.5% y/y in July, largely reflecting volatile components. Underlying inflation continues to fluctuate at around 3%. Services remain the main source of persistence, although there are signs of moderation. Greater discretion over the operation of MEPCO has increased uncertainty around CPI prints.
The BCCH appears to be waiting for greater clarity before making its next move. Another increase in fuel prices would not be sufficient for us to predict a hike, just as the recent weakness in activity is not sufficient for us to predict a cut. We continue to expect the BCCH to stay on hold, at least through the rest of 2026.
President José Antonio Kast was elected largely on a promise to restore public security, but his government’s new anti-crime agenda has exposed the limits of Chileans’ appetite for a heavy-handed approach to law and order. While measures targeting organized crime, criminal assets and prison-based networks enjoy broad public support, a proposed constitutional reform granting the president extensive emergency powers has generated widespread opposition.
The proposed reform would allow restrictions on freedom of movement, assembly, association and communication for up to 240 days without congressional authorization. Critics from across the political spectrum warn that such powers could weaken democratic safeguards, and establish a dangerous precedent. Polling suggests voters agree. The controversy should serve as a reminder to Kast that an effective response to crime need not come at the expense of the constraints on government discretion that underpin Chilean democracy.
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