Chile's unemployment hits eight-year high as budget gamble backfires

Chile closed September with a convergence of adverse signals that, taken together, add up to the most complex economic backdrop the government of José Antonio Kast has faced since taking office: a labor market deteriorating at an accelerating pace, an industrial sector in collapse, a currency enduring its worst quarter since 2024, and an oil price squeezing costs across the entire production chain. It is precisely against that backdrop that the President unveiled his first fiscal budget last night in a nationwide address, turning the day into a head-on collision between the urgency of reality and the bet on orderly austerity.

The hardest data point of the day came from the Instituto Nacional de Estadísticas: the unemployment rate climbed to 9.6% in the June-August quarter, its highest level since the March-May 2021 quarter, when the economy was still navigating the aftermath of the pandemic. The figure implies around 990,000 people looking for work without finding it, and a net destruction of more than 81,000 jobs over twelve months — the second consecutive annual decline in employment and the sharpest in years. The losses are concentrated geographically in the country's central-southern zone, with the Ñuble region showing the fastest deterioration nationally, and sectorally in manufacturing, which fell 7.6%, and information and communications, which plunged 16.8%. Formal salaried employment retreated 2.9%, while informality advanced 0.3 percentage points to 26.3% — a dynamic that Compañía Sudamericana de Vapores chairman Óscar Hasbún attributes directly to the cumulative effect of the minimum wage hike, the reduction of the workweek to 40 hours, and the pension reform, whose combined burden he estimates at roughly US$4 billion per year for the formal economy.

Job destruction is no isolated phenomenon: it accompanies a cycle of weakening activity that economists expect will again push the August Imacec into negative territory. The Industrial Production Index fell 5.7% year-on-year that month, its sharpest decline since May, dragged down by mining output that contracted 11.7% — its worst monthly print since March 2017 — and by eight consecutive months of declines in manufacturing. With trade flat and supermarket sales down 1.2%, analysts polled by Diario Financiero place the August Imacec in a range between -1.5% and -0.1%, with BICE Inversiones pointing to the lower end and describing an economy whose growth for all of 2026 would be essentially nil. The Banco Central will release the data this Thursday.

It is against this backdrop that the 2027 budget presented by Kast must be read: fiscal spending that will grow 1.5% in real terms over this year's execution, above the 0%-1% the market was expecting, but which Finance Minister Jorge Quiroz described as "perfectly consistent with our proposal for long-term fiscal consolidation." The budget will exceed $90 trillion, equivalent to about US$93 billion at the current exchange rate. The declared priorities are employment, security, and health, with a 4.7% increase in health resources and the announcement of artificial intelligence to prioritize patient care. The opposition was quick to question the real scope of the proposal: former Labor Minister Jeannette Jara noted that the target of 100,000 new jobs contemplated in the "Chile Despega" plan is roughly half of the positions destroyed during the current administration.

August's fiscal numbers offer, at least, a mixed read. According to the Dirección de Presupuestos, public revenues grew 13.8% in real annual terms during the month, driven by large private mining — whose tax contribution expanded 84.4% thanks to high copper prices and higher mining royalty collection — and by non-tax income that jumped 51.7%, in part due to a US$300 million dividend payment from ENAP. On a year-to-August basis, revenues are up 7.7% and spending only 1.0%, which explains the deficit reduction Dipres reported for the period. Copper traded on September 30 at US$6.57 per pound, with an annual average of US$6.09, 40.6% above the prior year, serving as virtually the only genuine cushion for the public accounts.

The problem is that this cushion coexists with mounting currency and cost pressures. The peso closed September at $973.5 per dollar, its weakest level since August 2025, accumulating a $50.5 drop in the third quarter — its worst quarterly performance since 2023 — and $39.65 in September alone. The pair is approaching the psychological barrier of $980 at a steady pace, despite the favorable performance of copper, which analysts attribute mainly to the rise in the US 10-year Treasury yield, trading at the close near 5.29%, its highest level since 2007, and to the Federal Reserve's rate hike, which raised its benchmark by 25 basis points to the 3.75%-4% range. The IPSA, for its part, fell for a fifth consecutive session, lost the 11,000-point level, and ended September with a monthly decline of 3.1% in pesos and 7.2% in dollar terms, its worst month since February. Market participants note that long-dated Chilean peso bonds, whose yields now exceed 6%, have become "considerably" more attractive after the recent adjustment, given the high share of foreign investors in that segment.

Added to this picture is a fourth consecutive hike in fuel prices: 93 and 97 octane gasoline will rise $39.4 per liter starting Thursday, diesel will climb $95, and kerosene $281.8, in a context where crude has jumped from US$70 to US$100 on the conflict between the United States and Iran and its impact on the Strait of Hormuz. The White House is weighing restrictions on diesel exports, adding a geopolitical dimension to local cost pressures. The government promised trucking associations a mitigation proposal within 15 days, but without announcing concrete immediate relief measures.

In mining, attention shifts to Escondida, the world's largest copper mine operated by BHP: the N°2 supervisors' union rejected the company's latest offer with 95% of votes against, and a strike could materialize on October 6 if the company does not request mediation before that date. A "practically complete" stoppage at Escondida in this context — with copper at highs, the labor shortfall pressuring the market, and the fiscal budget critically dependent on mining revenues — would represent a first-order risk both for public finances and for the credibility of the government's reactivation plan.

What comes in the next few days will define the tone of the fourth quarter. The August Imacec that the Banco Central will publish this Thursday is the first empirical test: if it confirms a drop of 1% or more, pressure on the Executive to accelerate reactivation measures will become hard to contain. In parallel, the Escondida negotiation and the budget's passage through Congress — where the opposition has already warned that "the numbers don't add up" — are the two political fronts with the greatest immediate impact. In the currency and fixed income markets, the trajectory of US Treasury yields will remain the determining external factor for the peso and for the country's financing costs.

---