Impact on GDP: The earthquake is a shock that reduces supply drastically, mainly due to the damage or destruction of the two basic factors of production, capital and labor. In this particular case, several sources are estimating a sharp decline in output in the short run, during the March/April/June period, resulting primarily from a reduction in the output of the industrial sector. For the whole of 2010, some analysts see that the earthquake will have a negative impact on growth, although it will be low.  For example, LarrainVial estimates the earthquake will reduce expected growth 1.6 percentage points in 2010; however, this would be partially compensated for by the increase in rebuilding construction activity, resulting in a net impact of –0.4 percentage points. Similarly, Bank of America cut its forecast for growth in Chile by 0.7 percentage points. On the other hand, other analysts believe that the net impact on Chilean growth will be positive; JPMorgan Chase, for example, expects growth of an additional 0.5% over the previous forecast because of reconstruction work.

Inflation: The initial shortage in production of goods and services will increase prices in general, mainly resulting from increases in food and transportation prices. Volatility in price behavior is also expected to increase. Price growth will differ from region to region, being higher in the areas closer to the epicenter.  Given the high weight of Concepcion in the national CPI calculations, national inflation is expected to be high in the short run. However, in the medium run, the rebuilding efforts are expected to resolve the supply problems, which, coupled with the wide output gap due to the 2009 recession, would very likely contribute to absorb the inflationary impact of the reduction in output. Several sources estimate that, given the medium-term horizon considered by the Central Bank in the design of its interest rate policy, the increase in short-term inflation should not result in dramatically higher interest rates. If interest rates remain low, the cost of capital will also remain low, with better prospects for investment in the medium and long run.

Destruction of wealth:  Earthquakes affect production, but also undermine the stock of wealth, basically through the damage of infrastructure, real estate and the loss of human lives.  Preliminary estimates of losses in wealth are US$15-30 billion (equivalent to 10%-20% of GDP). The National Association of Insurance Companies estimates a total of US$2.6 billion in insured damage, which would lead to a similar total damage value of US$30 billion.  The Chilean Ministry of Finance stated on March 1 that total damage would be less than this estimate.  The reduction in wealth will result in downward pressures on consumption, which should contribute to low interest rates and therefore, more investment spending.

Other experiences: In other cases of massive destruction, such as the tsunamis in South East Asia on December 26, 2004, many studies and estimates show that growth is affected primarily during the following quarter, with an impact on GDP -- resulting from the catastrophic event coupled with reconstruction activities -- of approximately +/-1%.

Impact on GDP: The earthquake is a shock that reduces supply drastically, mainly due to the damage or destruction of the two basic factors of production, capital and labor. In this particular case, several sources are estimating a sharp decline in output in the short run, during the March/April/June period, resulting primarily from a reduction in the output of the industrial sector. For the whole of 2010, some analysts see that the earthquake will have a negative impact on growth, although it will be low.  For example, LarrainVial estimates the earthquake will reduce expected growth 1.6 percentage points in 2010; however, this would be partially compensated for by the increase in rebuilding construction activity, resulting in a net impact of –0.4 percentage points. Similarly, Bank of America cut its forecast for growth in Chile by 0.7 percentage points. On the other hand, other analysts believe that the net impact on Chilean growth will be positive; JPMorgan Chase, for example, expects growth of an additional 0.5% over the previous forecast because of reconstruction work.

Inflation: The initial shortage in production of goods and services will increase prices in general, mainly resulting from increases in food and transportation prices. Volatility in price behavior is also expected to increase. Price growth will differ from region to region, being higher in the areas closer to the epicenter.  Given the high weight of Concepcion in the national CPI calculations, national inflation is expected to be high in the short run. However, in the medium run, the rebuilding efforts are expected to resolve the supply problems, which, coupled with the wide output gap due to the 2009 recession, would very likely contribute to absorb the inflationary impact of the reduction in output. Several sources estimate that, given the medium-term horizon considered by the Central Bank in the design of its interest rate policy, the increase in short-term inflation should not result in dramatically higher interest rates. If interest rates remain low, the cost of capital will also remain low, with better prospects for investment in the medium and long run. 

Destruction of wealth:  Earthquakes affect production, but also undermine the stock of wealth, basically through the damage of infrastructure, real estate and the loss of human lives.  Preliminary estimates of losses in wealth are US$15-30 billion (equivalent to 10%-20% of GDP). The National Association of Insurance Companies estimates a total of US$2.6 billion in insured damage, which would lead to a similar total damage value of US$30 billion.  The Chilean Ministry of Finance stated on March 1 that total damage would be less than this estimate.  The reduction in wealth will result in downward pressures on consumption, which should contribute to low interest rates and therefore, more investment spending.

Other experiences: In other cases of massive destruction, such as the tsunamis in South East Asia on December 26, 2004, many studies and estimates show that growth is affected primarily during the following quarter, with an impact on GDP -- resulting from the catastrophic event coupled with reconstruction activities -- of approximately +/-1%.