Weaker economic growth in 2016 was caused by lower commodity prices and lower export demand. Consumer and business confidence has been fragile, but growth is projected to edge up in 2017 and 2018 as the stronger global economy helps demand for exports to recover.
The introduction of VAT on Chilean housing has seen a decline in the number of housing permits issued, reducing demand for residential construction projects. High levels of off-the-plan sales in 2015 caused numerous housing projects to be delivered to market in 2016, helping to moderate price growth in busy markets such as Santiago.
Infrastructure construction is also slowing down as the government pledges to reduce the fiscal deficit. The weaker commodity market reduced the need for office space, leading to increased vacancy rates and a drop-off in the number of new projects under construction.
Fortunately for the Chilean economy, copper prices look to have bottomed out in this cycle. Prices saw a significant improvement late in 2016, which should help restore much-needed confidence in the outlook. Meanwhile, announcements of major infrastructure investment in the US economy will also help buoy copper futures.