SANTIAGO, Sept 30 (Reuters) - An economic slowdown continues to grip world No. 1 copper producer Chile, government data showed on Tuesday, as manufacturing production posted its biggest monthly drop in two years and the jobless rate crept higher.
Factory output fell 4.9 percent in August from a year earlier, well below market forecasts, while the jobless rate for the June to August period rose to 6.7 percent.
"In August, there was reduced dynamism in the domestic economy, in particular in manufacturing production," the government's INE statistics agency said.
Production fell across the board, with metals, agricultural chemicals, wood pulp, and food, all key industries for Chile, getting hit.
Retail sales, a barometer of consumption and a mainstay of the economy in recent years, rose a relatively anemic 1.7 percent in August from a year earlier as sales of durable goods decreased, the INE data showed.
A slowdown in mining investment in the world's top copper exporter has spread to domestic demand, hurting sentiment and complicating President Michelle Bachelet's ambitious reform program.
To counteract the slowing economy, Bachelet's government is expected to send Congress later on Tuesday a public budget for 2015 that would provide the biggest boost in spending in seven years.
Chile's government and the central bank have predicted a gradual recovery from the final quarter of 2014 and a stronger performance in 2015. The bank forecasts growth of between 1.75 and 2.25 percent in 2014, compared with 4.1 percent last year. (Reporting and writing by Anthony Esposito; Editing by W Simon, Rosalba O'Brien and Peter Galloway)