OECD Economic Outlook, Volume 2023 Issue 2

Chile

After zero growth in 2023, output will increase by 1.8% in 2024 and by 2.1% in 2025. Rising real wages, due to lower inflation, and falling interest rates will allow consumption to pick up in 2024. Business confidence has improved, but policy uncertainty will weigh on investment growth during early 2024. Strong demand for minerals will continue to sustain exports. Headline inflation will continue abating and will reach the central bank target in the second half of 2024, while core inflation will fall at a slower pace.

The central bank is projected to continue easing monetary policy and reach a neutral stance by late 2024. Fiscal policy will be slightly expansionary, with expenditure in line with the fiscal rule and revenue from mining, including from a new mining royalty, helping to ensure moderate deficits. Government debt will remain at manageable levels. Chile should move towards a more progressive tax system that brings in more revenue for expenditure that enhances growth and reduces inequalities. The global shift toward renewable energies is an opportunity for Chile given its natural resources.

Domestic demand has been weak

Output grew by 0.3% in the third quarter of 2023 largely due to net exports, as domestic demand is still weak, with a fall in investment offsetting a recovery in consumption. Growth was underpinned by energy and water services, and mining. High-frequency data show retail sales growing in October. Business confidence has improved but is still below historic levels. Headline inflation has fallen steadily and stood at 5% in October, down from 14.1% in August 2022. Core inflation is also falling, and two-year inflation expectations have remained anchored at the 3% target since March.

Chile: Economic growth and inflation indicators

1. Consumer price index excluding energy and food.

Source: Central Bank of Chile; and INE.

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Chile: Demand, output and prices

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Falling commodity prices earlier this year helped inflation to come down. Copper prices have fallen since July but are still strong. Growth in China has also been weaker than expected. However, a recovery in worldwide tech production since the beginning of 2023, a positive outlook for the use of copper and lithium for electrification, and low global copper inventories signal room for export growth.

Monetary easing will continue and fiscal policy will return to moderate deficits

Past monetary policy tightening has helped reduce inflation, and expectations have remained anchored at the central bank’s target. The Central Bank of Chile began an easing cycle in July, taking the policy rate from 11.25% to 9.0% in November. This is expected to continue over the next two years, with policy rates reaching a more neutral stance from the end of 2024 and being lowered to 4% by the latter half of 2025. In August, the government lifted the freeze on public transport fares, while other support measures to cushion the impact of higher energy prices will end in December 2023. Overall, the fiscal stance will be moderately expansionary, with deficits of 2% of GDP in 2023, 2.3% in 20224, and 1.6% in 2025. This will keep government debt below 45% of GDP, the prudent level set in the decree outlining fiscal policy objectives. Expenditure will follow the fiscal rule based on cyclically-adjusted revenues. Demand for minerals in the medium term will continue to support revenue, although receipts from mining contracts for lithium will moderate in 2024. Revenue from a new copper mining royalty will start coming during 2024-25.

Growth will rebound in 2024-25

Output will rise by 1.8% in 2024 and 2.1% in 2025. Rising real wages, due to falling inflation, and lower interest rates from monetary easing will help consumption and investment pick up during 2024. The sustained worldwide shift towards electrification, especially of vehicles, will support strong demand for mineral exports. Inflation will continue to abate, with headline inflation reaching the target of the central bank in the second half of 2024. The fall in core inflation will be slower due to indexation of wages and tariffs. Risks to this outlook are tilted to the downside. A deeper slowdown in China can reduce demand for minerals, hurting Chile’s exports and growth. Protracted negotiations during 2024 of the tax and pension reforms proposed by the Government could affect policy uncertainty. Climate-change induced events like a worsening of the drought or extreme rains could hit crops, mining and infrastructure, reducing growth and requiring fiscal support.

Growth-enhancing expenditure requires raising more revenue

Tax revenue as a share of GDP is low by OECD standards, with few people paying income tax. A more progressive tax system is needed, along with improvements in tax administration, to increase revenue from personal and property taxes. This would allow more expenditure that enhances growth and reduces inequalities, such as boosting public support for SMEs and improving digital infrastructure. Chile is well positioned to profit from the global shift toward renewables. To promote greener energy generation, exemptions from the carbon tax should be accelerated for plants to further incentivise the use of renewables.