OECD Economic Outlook, Volume 2023 Issue 1

Chile

Economic activity will drop by 0.1% in 2023 and increase by 1.9% in 2024. Tighter financial conditions and the withdrawal of pandemic‑related support will reduce household consumption during the first half of this year. Higher interest rates and uncertainty will also hit investment during 2023. As the effects of the monetary policy tightening are passed to activity, inflation will continue to abate throughout 2023, and return to target in late 2024.

Monetary policy will remain tight, but the budget balance will move back into deficit. Higher investment in social programmes and infrastructure to meet social demands and boost productivity requires a more progressive tax system that allows for additional revenue. Increasing productivity will also require reducing barriers to competition and ensuring proper funding of the competition authority, as well as focusing research and development support on the most effective programmes.

Activity continues to decelerate

GDP grew by 0.8% in the first quarter of 2023, but economic activity decreased in March and April, as measured by the monthly indicator of economic activity (IMACEC), and weak retail and car sales suggest an ongoing downward adjustment in consumption levels after the withdrawal of support measures to face the pandemic. Despite subdued demand, inflation has been persistent, with headline and core decreasing slightly but remaining around 10%. However, one-year-ahead inflation expectations are decreasing, and two-year inflation expectations remain anchored within the central bank’s tolerance band. Real wages started to recover in the first months of 2023.

Chile: Economic growth and inflation indicators

1. The shaded area represents the central bank's inflation target range.

2. Consumer price index excluding energy and food products.

Source: Central Bank of Chile; and INE.

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Chile: Demand, output and prices

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Tightening monetary policy in trading partners slowed export growth in 2022, but China’s reopening should increase demand for inputs for the tech industry, among them minerals exported by Chile. The Government mitigated the impact of higher energy prices stemming from Russia’s war of aggression against Ukraine by raising minimum wages, granting subsidies to the vulnerable population, freezing public transport fares, and implementing measures to stabilise the prices of fossil fuels and electricity. The freeze in transport fares was extended until June and in some cases until December 2023, and a rebate of taxes paid on diesel for land freight was introduced in January 2023, expiring in December.

Tight monetary policy is set to continue, fiscal deficits will return

Public expenditure will grow slightly in real terms, focused on social expenditure and investment amid a negative output gap, while revenue will moderate with the downturn in activity during 2023. The central government deficit will be 2.0% of GDP in 2023 and 2.1% of GDP in 2024, which will not threaten debt sustainability. The central bank has continued to tighten policy to curb inflation and control inflation expectations, taking the policy rate to 11.25% and vowing to keep it at that level until there is clear convergence of inflation towards target. As these increases are transmitted to other interest rates, their effects on consumption and investment, and ultimately inflation, will be felt mostly during 2023 and early 2024. The projection assumes moderate declines in the policy rate in the second half of 2024.

Following a downturn in 2023, the economy will rebound in 2024

Real GDP will contract by 0.1% in 2023 but rebound by 1.9% in 2024. The withdrawal of pandemic-related support measures and tight monetary conditions will hold back consumption and investment during 2023, but these effects should abate by early 2024. Stronger external demand, notably from China, should sustain export growth. Risks are tilted to the downside. Russia’s war of aggression against Ukraine could lead to further energy price pressures, delaying policy easing. A stalling of the recovery in China, Chile’s main trading partner, would decrease exports and investment, thus lowering growth. A worsening drought would impact copper mining and agriculture. Failure to pass a new Constitution, and lack of clarity on the future of the tax reform could heighten policy uncertainty, hurting business and consumer confidence and leading to sluggish consumption and investment.

Reforms are needed to increase productivity and enhance social expenditure

Improvements in social programmes and infrastructure would require raising more revenues, from their low levels compared to the OECD countries, through a more progressive tax system. Productivity would be boosted by strengthening competition through lower barriers to entrepreneurship and proper funding of the competition authority, and higher investment in efficient research and development initiatives. Expanding access to early childhood care and increasing funding of pre-school education can improve educational outcomes for children in low-income families and boost female labour market participation.