OECD Economic Outlook, Volume 2022 Issue 2

Chile

Growth is expected to slow to 1.9% in 2022. A 0.5% contraction of output is projected for 2023, followed by growth of 2.6% in 2024. Tighter financial conditions, the withdrawal of pandemic-related support measures and the eroding effect of inflation on purchasing power will dampen household consumption. Higher interest rates and low business confidence will keep investment subdued. Inflation has recently started to abate and will continue moderating throughout 2023, as the effects of monetary policy tightening on growth and inflation become visible, and will return towards the Central Bank of Chile’s 3% target in 2024.

Monetary conditions will need to remain tight to ensure that inflation returns to the target. Adherence to the fiscal rule will allow for moderate deficits in 2023 and 2024, after a surplus in 2022 due to strong revenue collection and the withdrawal of pandemic spending. Reducing barriers to competition and boosting investment in research and development would spur productivity. The envisaged tax reform would make the tax system more progressive and raise additional revenue to strengthen social programmes and public investment.

Activity has cooled down during 2022

Production contracted in the first quarter of 2022 and remained flat in the second. The generous support measures that underpinned a fast recovery from the pandemic have been withdrawn, slowing private and government consumption, and business sentiment has worsened due to inflationary pressures. Monthly activity indicators for retail and manufacturing have remained weak for most of the year, and the unemployment rate has risen steadily, reaching 8% in September. Surging energy and food prices and demand pressures have pushed inflation to historic heights, reaching 12.8% in October, with medium‑term inflation expectations close to the upper limit of the central bank’s 2-4% tolerance band, suggesting a risk of de‑anchoring.

Chile

1. 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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The Russian war of aggression against Ukraine continues to condition inflation and growth developments, both directly, as commodity prices remain high, and indirectly as external demand cools on the back of the energy squeeze and tighter monetary conditions. To soften the impact of higher energy costs, the government provided a one-time cash transfer for winter expenses to vulnerable populations, froze fares on regulated public transportation throughout the country during 2022, and twice increased the subsidy for the existing stabilisation mechanism for fuel prices. Monthly targeted cash transfers to alleviate higher food prices will continue until April 2023.

Commitment to the fiscal rule and restrictive monetary policy in 2023-24

The strong fiscal measures to mitigate the pandemic’s adverse effects have been withdrawn, and the government is committed to the fiscal rule. Strong revenue collection and lower expenditure will lead to a budget surplus of 1.5% of GDP in 2022. Revenue will moderate as the economy cools down and inflation abates in 2023, but will pick up as activity gains momentum in 2024. In keeping with the fiscal rule, expenditure will grow moderately in real terms in 2023‑24. The deficit is expected to reach 2.8% of GDP in 2023 and 2.1% of GDP in 2024, and public debt will remain below the prudent debt ceiling of 45% of GDP despite the expansionary policy stance in 2023. The Central Bank of Chile has countered inflationary pressures by raising its policy rate, from 0.5% in June 2021 to 11.25% by October 2022. It has stated that the rate will remain at that level as long as necessary to bring inflation back to the target. The projection assumes mild declines in the policy rate in 2024, as inflation wanes.

After a contraction in 2023, growth will resume in 2024

The economy will contract by 0.5% in 2023 and gradually strengthen in 2024. Inflation, tighter financial conditions, and low business confidence will hit consumption and investment during 2023, and weaker growth in trading partners will dampen export growth. As the economy cools, unemployment is projected to increase in 2023, but it will decline in 2024 as growth picks up. Inflation will remain elevated throughout 2023, owing to the lingering effects of high energy prices, but the projected economic downturn and high interest rates will help bring it back to target. Risks appear tilted to the downside. Uncertainty about the path of reform for the Constitution could weaken business and consumer confidence. The war in Ukraine could continue to generate inflationary pressures from energy and commodity prices, which could feed inflation expectations and require further policy tightening, leading to a longer period of below trend growth to bring inflation back to target. Weaker-than-expected growth in Chile’s main trading partners, particularly China, would impact exports and investment. On the upside, copper prices could be stronger than assumed, boosting exports. A smooth resolution of the constitutional reform process could strengthen confidence and attract investment.

Policies should aim for higher productivity and a more progressive tax system

Sustainable social and economic progress will require reforms in several areas. Reducing barriers to competition and entrepreneurship, investing more in research and development, fostering female participation in the labour force, and lowering labour costs for formalisation would increase productivity and raise incomes. The tax reform being discussed in Congress, to make the system more progressive, would increase revenues, helping to meet demand for higher social protection and better public services. Achieving Chile’s ambitious goal of carbon neutrality by 2050 will require more stringent regulations, and commitments to phase out coal and implement carbon taxes and cap and trade systems to improve price signalling. Taking advantage of the country’s remarkable potential for renewable energy, notably solar and wind power, and green hydrogen production would reduce dependence on fossil fuels.