OECD Economic Outlook, Volume 2020 Issue 2

Chile

Chile is set for a gradual recovery over the next two years, with activity returning to its pre‑pandemic levels in late 2022. GDP growth will be 4.2% during 2021, after a contraction of 6% in 2020. Private consumption will be a main driver of the recovery, initially sustained by measures implemented by the government to support households, a gradual improvement of the labour market sustained by hiring subsidies and withdrawals from pension funds. Investment will regain momentum at a slow pace, conditional on the evolution of the pandemic, driven by public infrastructure plans, supportive financing conditions and tax incentives. Recovering global demand will also be beneficial.

Solid fiscal and monetary policy frameworks allowed the authorities to pursue bold measures, which prevented a deeper contraction and are avoiding deeper scars from the pandemic. Continuing with an ambitious structural reform agenda, in particular planned reforms to bolster pensions and female participation in the labour force, would sustain an inclusive recovery. Additional public investment, especially in education, the lifelong learning system, active labour market policies, and digital and transport infrastructure, would help strengthen the recovery further.

The country has been hit hard by the pandemic

Chile has been hit hard by the pandemic, with one of the highest numbers of deaths per million inhabitants. The cases have been concentrated in the Santiago metropolitan area, with scattered outbreaks in other regions of the country. Local quarantines, mobility restrictions and night‑time curfews have been applied across the country. The city of Santiago and other large cities were put under a strict lockdown in May, with most containment measures lifted progressively in mid‑July, when infections started declining. A state of emergency, declared in March to impose containment measures, has been extended until the end of the year.

Chile: Investment and labour market

1. The rest includes employers, domestic workers and unpaid family workers.

Source: OECD Economic Outlook 108 database; and INE.

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Chile: Demand, output and prices

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Economic activity has started to recover

After the social protests in late 2019, the COVID-19 outbreak has pushed the economy into its deepest recession since 1982. Employment has reached a historic low after almost 25% of the labour force lost their jobs. Around 10% of firms are using the job retention scheme, which now covers nearly 17% of all dependent workers. With containment measures being relaxed gradually since July, short‑term indicators suggest that economic activity has started to recover, particularly retail sales and manufacturing output, while tourism and hospitality continue to be weak. Business sentiment has improved considerably and consumer confidence has lately picked up as well. Inflation remains contained due to the strong contraction of demand.

Bold policy reactions will limit the economic scars of the pandemic

The monetary policy stance has been highly expansionary, with record‑low policy rates and unconventional measures ensuring both financial stability and credit expansion. These policies should be maintained as planned to support the recovery. The fiscal response was among the largest in the region and included cash transfers for informal and vulnerable households and the middle class, a job retention scheme, tax deferrals and reductions, and liquidity provisions and guarantee measures to help firms. Furthermore, an agreement between political parties led to a temporary emergency plan to support the recovery of the economy for the coming two years and a commitment to fiscal consolidation thereafter. This agreement, based on hiring subsidies, measures to support low‑income households, public investment and tax incentives for firms, will help the recovery and make it more inclusive. Measures to speed up and streamline regulations and private investment projects are also being implemented.

A gradual recovery is underway in an uncertain environment

Economic recovery will be gradual and uneven in the next two years. Private consumption will be the main driver of the recovery, due to formal employment gains supported by hiring subsidies, but precautionary saving will remain high. Private investment will start to recover only slowly, given high uncertainty, and is conditional on the evolution of the pandemic. Mining exports have been resilient and Chile will further benefit from recovering global demand, especially from China and the United States. Additional virus outbreaks are the main risk to the outlook, until an effective vaccine becomes widely deployed, and could require persistent limits to international travel, bans on large public events, and restrictions on bars and restaurants. The ongoing constitutional review, a series of elections during 2021 and renewed social protests could further increase uncertainty and dampen investment. Exports and job creation would benefit from a potentially stronger global recovery than anticipated.

An ambitious structural reform agenda would strengthen inclusive growth

Public debt is increasing rapidly, but is expected to remain sustainable provided that the temporary fiscal measures are phased out once the recovery is fully underway. The authorities should focus on efficiency‑enhancing reallocation of public spending, for example through the reduction of tax exemptions. Continuing to strengthen the fiscal framework, including the fiscal rule and the already successful Autonomous Fiscal Council, would reinforce the credibility of fiscal plans. The second wave of extraordinary withdrawals from pension funds will decrease and, in many cases, deplete individual retirement savings and could potentially be disruptive to financial markets, while having only a small positive impact on demand. Direct public support for those in need would be better to strengthen demand while preserving future old-age pensions.

Continuing with an ambitious structural reform agenda will be the key policy lever to boost inclusive medium‑term growth. Addressing long‑standing barriers to productivity growth will require better spending in education and ensuring that firms are more exposed to competition and innovation. Streamlining regulation on concessions in the communications sector would foster the deployment of digital infrastructure and help reduce connectivity gaps. A full revision of employer‑provided training programmes could increase the quality and the targeting of these programmes on vulnerable workers, improving their prospects of finding formal jobs in expanding sectors. The current bill to streamline and simplify bankruptcy procedures would promote a faster reallocation of capital.