Chile's industrial output collapses as geopolitical oil shock hits recession-bound economy

The 5.1% year-on-year drop in July's Industrial Production Index — the second-deepest decline of the year and an unprecedented setback since March 2023 — comes at the worst possible moment: this Tuesday brings the release of July's Imacec, and the sectoral data published Monday by the INE all but guarantee a reading that will confirm the sustained deterioration of an economy already mired in technical recession. What elevates this session beyond a single grim statistic is the simultaneous convergence of multiple negative fronts, both domestic and international, feeding off one another with a synchrony that is hard to ignore.

The IPI breakdown offers no silver lining. The Mining Production Index fell 7.2% over twelve months, accounting for the largest negative contribution to the indicator, while manufacturing contracted 4.9%. Only the electricity, gas and water supply segment posted positive territory. The January-July cumulative figure already shows a 3.2% contraction, and the only month in the black this year was June, with a mere 1.4% gain — insufficient to prevent the economy from entering technical recession after the second quarter. Compounding this, July retail sales grew just 2.2% year-on-year, well below what would be needed to offset weakness in production, foreshadowing — as Diario Financiero noted — a markedly weak Imacec when it is released tomorrow.

The external backdrop aggravates the picture. US military strikes against Iranian forces in the Strait of Hormuz, and Tehran's retaliation against American bases in the region, pushed Brent crude up 3.1% to US$90.9 per barrel, squeezing energy costs in an economy already facing a structural water deficit. The dollar opened slightly lower against the peso as markets tried to digest Friday's reactions, but geopolitical tensions kept traders on high alert. The IPSA opened with moderate losses, weighed down in particular by Latam Airlines shares and retail names — two sectors that account for a significant portion of local market capitalization and are especially sensitive to both consumer sentiment and fuel costs.

And Chilean consumer sentiment is, to put it precisely, at critical lows. The Ipsos CCI index dropped four points in August to a level not seen since February 2023, positioning Chile as the worst performer in Latin America for the month, partly affected by the frontal weather system that battered the country. The confidence slump is not an isolated phenomenon: it lands on an already deteriorated labor market base, where the number of employed persons fell 0.2% over twelve months — equivalent to 16,292 fewer jobs — marking the first annual destruction of employment since the February-April 2021 quarter. Experts warn that job searches now average more than eight months in duration, a structural signal that cannot be resolved through monetary policy cycles alone.

Faced with this recessionary scenario, the government is rolling out a second-generation reform agenda whose timing is as evident as its implementation risks. Finance Minister Jorge Quiroz previewed that the capital markets reform, scheduled to launch on September 7, will center on facilitating access to housing through better credit conditions, alongside the elimination of what Quiroz himself dubbed "minibar taxes": the 4% withholding tax, the stamp duty, and the RUT requirement for certain transactions — barriers that discourage foreign capital inflows. The Comisión para el Mercado Financiero, for its part, published its own financial modernization policy document on Monday, which includes refining the framework for internal credit risk models in banking and streamlining regulatory procedures. Both initiatives overlap with the Banco Central's effort to internationalize the Chilean peso — a process that has gained traction since 2020 and which the Chile Day event in Madrid and London, scheduled for mid-September, will seek to project to European investors.

The foreign agenda adds a relevant political dimension. Javier Milei will visit Chile this Thursday to meet with President José Antonio Kast in their third bilateral encounter since Kast took office in March, in addition to participating in a Fundación Disenso forum. The visit comes just days after Chile and Argentina formally reactivated the Administrative Commission of the 1997 Mining Integration and Complementation Treaty, giving the green light to three protocols covering the Vicuña, NexoAndino and Filo Sur projects — cross-border copper, gold and silver initiatives involving companies of the caliber of BHP and Lundin. Argentina's Mining Secretary, Luis Lucero, acknowledged without euphemism that "Argentine mining was asleep." The treaty's reactivation is, in this context, one of the few long-term investment catalysts the landscape clearly offers.

Pushing in the opposite direction, Sofofa continues to press the tax agenda, backed by its own study estimating that a four-percentage-point cut in the First Category Tax — from 27% to 23% — could generate between 80,800 and 330,000 additional jobs between 2026 and 2030, depending on the growth scenario. The trade association points out that Chile has become the OECD country that raised its corporate rate the most over the past two decades, an argument that gains additional force in a week when data on production, employment and confidence all point in the same worrying direction.

What warrants close monitoring in the coming hours and days is the July Imacec figure, due Tuesday, which will determine whether the market revises its expectations regarding the Banco Central's pace of rate cuts. The succession of Rosanna Costa at the helm of the central bank — whose term ends on February 3 — adds an institutional variable that markets will begin to price in more intensely as the date approaches. The evolution of the conflict in the Strait of Hormuz, with Brent already near US$91, constitutes the most immediate external risk for an open economy that cannot afford a new energy shock while its productive sector accumulates months of contraction.