OECD Economic Outlook, Volume 2018 Issue 1

Chile

Growth is projected to accelerate to around 3.6% in the coming years supported by an improving external outlook and favourable financial conditions. Real wages will grow as salaried employment recovers, lifting private consumption and reducing income disparities. Increasing aggregate demand, a supportive monetary stance and a stable exchange rate will raise inflation.

Government spending and debt have increased but the planned fiscal consolidation should be gradual enough to leave room for needed investments in health, education and infrastructure. Streamlining licencing and regulations, raising public support for R&D and improving infrastructure would boost stalled productivity. Building on recent reforms in the education system, developing apprenticeships, and assuring relevant skills at all levels of education and activation policies, would boost productivity and inclusiveness.

The economy is at a turning point

Growth started gaining momentum in the second half of 2017. Business and household confidence and exports have surged, helped by historically low interest rates, higher external demand and firmer global copper prices. Investment is rebounding as mining investment is stabilising. Employment and wage gains are increasing, supporting real disposable income and private consumption. Consumer price inflation has been in line with expectations, remaining at around 2%, the lower limit of the central bank's 2‑4% target band.

Structural reforms would support medium-term growth

Monetary policy is expected to remain appropriately supportive as medium‑term inflation expectations remain well anchored. The central bank reacted to the growth and inflation slowdown by cutting the policy rate, which is now well below historical norms. As the economy strengthens and the effects of the strong currency appreciation dissipate, inflation is set to return to the middle of the target range by the second half of 2019. As price pressures increase, the central bank is projected to start gradually increasing the policy interest rate.

Chile

1. Four-quarter moving average.

Source: OECD Economic Outlook 103 database; and Central Bank of Chile.

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The new government has pledged to pare down the fiscal deficit. The fiscal stance is broadly appropriate with a gradual consolidation in line with the fiscal rule. A decline in infrastructure investment could weigh on long‑term growth if the planned increase in public‑private partnership projects fails to materialise. Broadening public revenues, notably by increasing green or property taxes or broadening the personal income tax, would spread the benefits of the recovery more widely. Simplification of the tax system would help bolster medium‑term growth.

Chile. Demand, output and prices

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Reforms to boost investment and productivity are needed to sustain high medium‑term growth. Proposed recent measures that simplify regulations and licensing procedures will likely boost investment. More public‑private research collaboration, better transport and logistic infrastructure and direct support for R&D are needed to strengthen innovation. Higher competition in key sectors, such as telecommunications, maritime services and railways, would raise investment. Further expansion of childcare facilities would boost the still low female employment in paid jobs. Easing regulations on open‑ended labour contracts while extending unemployment insurance would tackle labour‑market segmentation and reduce inequalities. The planned reform to improve pensions by increasing the low contributions and the solidarity pillar could raise equity. Progressively increasing and aligning the retirement age of women and men would further improve pensions for the elderly.

Growth is projected to gather pace

Growth is taking root as a more dynamic global outlook and still low interest rates are stimulating economic activity. Domestic demand will play an important role in the pick‑up of growth, and will be driven by good financing conditions and rising business and consumer confidence. In particular, the recovery in investment growth is expected to provide a positive impulse, although it will remain low by historical standards. Stronger job creation will support household consumption. Still, the economy will remain vulnerable to faster‑than‑expected normalisation of US monetary policy and escalating global protectionism. Stronger copper prices would raise investment and government revenues. Labour disputes at key mines and other big enterprises could limit growth.