(Bloomberg) -- Chile’s economic activity posted its biggest monthly drop since May as services declined, pushing one of Latin America’s richest nations toward recession and paving the way for more big interest rate cuts.

The Imacec index, a proxy for gross domestic product, fell 0.5% in August from July, compared to the median estimate for a 0.2% gain from analysts in a Bloomberg survey. It matched the 0.5% decline recorded in May. From a year prior, the index dropped 0.9%, the central bank reported on Monday.

Chile has been battered this year by high interest rates, above-target inflation and uncertainty among top trading partners like China. Today’s figures indicate the country is heading back into recession after GDP contracted in the second quarter. Still, the economy is expected to gradually bounce back, expanding 2% in 2024 after posting one of the region’s worst performances this year. 

Read more: Chile Central Bank Sees Rates Trending Down, Warns of Volatility

“A technical recession in the third quarter is very probable, as it only requires a 0.3% month-on-month drop in September,” Jorge Selaive, chief economist at Scotiabank Chile, posted on X, the platform formally known as Twitter. 

The peso fell as much as 0.5% against the dollar in morning trading. Two-year swap rates, a measure of key rate expectations, dropped 6 basis points to 6.39%.

Education Services

Services declined 0.9% on the month in August with the sector dragged down by eduction, while mining slipped 0.3%, according to the central bank. On the other hand, commerce gained 0.6% on the back of automobile sales.

What Bloomberg Economics Says

“August activity data added evidence that domestic demand is cooling in Chile. Activity figures support decelerating inflation and back our expectations for the central bank to continue cutting interest rates into 2024. They are likely to keep weakening pressure on the currency.”

— Felipe Hernandez, Latin America economist

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Policymakers cut borrowing costs by a total of 175 basis points in their last two meetings, lowering the key rate to 9.5%, and economists expect it to hit 5% in a year. Central bankers have room to ease as inflation slows toward target.

Next year will be marked by low inflation and a revival of the local economy, President Gabriel Boric said in a televised speech late on Thursday. His words echoed comments from Finance Minister Mario Marcel, who said in an interview last month that the economy is stabilizing after a series of shocks.

Still, many analysts are not as up-beat. Unemployment rose more than expected in August as thousands of jobs were destroyed, according to official data published on Friday, while local political uncertainty is rising again.

“We will see slightly negative readings in coming Imacec reports,” analysts at Bice Inversiones wrote in a note. “As a result, for 2023 we expect activity to contract by about 0.5%”

--With assistance from Rafael Gayol and Giovanna Serafim.

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