OECD Economic Outlook, Volume 2024 Issue 1

Chile

Output is projected to grow by 2.3% in 2024 and 2.5% in 2025. A recovery in real wages helped by falling inflation and looser financial conditions will support a recovery in consumption over 2024-25. Business confidence has improved, but stagnant credit will continue to restrain investment growth during 2024. Global demand for minerals will underpin export growth in 2024-2025. Inflation will converge to the 3% target in mid‑2025.

The central bank will lower the policy rate further during 2024 reaching a neutral policy stance by mid‑2025. Appropriately, fiscal policy will be less expansionary in 2024 and 2025, and debt will remain at sustainable levels. Chile should continue efforts to streamline regulatory processes to boost competition and entrepreneurship, and make its tax system greener and more progressive to reduce inequalities and spur more inclusive and sustainable growth.

Activity is picking up

The economy grew in the fourth quarter of 2023 largely due to net exports. Personal services were the main contributor to growth, followed by transport. The monthly activity indicator (IMACEC) rose by 2.8% year-on-year (seasonally adjusted) in February, with increases across all sectors and large contributions from mining and services. Business confidence remains subdued but industrial production and retail sales are up compared with February of last year, and activity and employment rates have grown steadily since August. Headline inflation fell below 4% in March, and inflation expectations are firmly anchored at the target.

Inflationary pressures from commodity prices have subsided. Growth in China has been weaker than expected, contributing to slower electric vehicles sales and to excess inventory for battery makers. This has helped to drive down lithium prices. Copper prices have been increasing recently, and demand from transport electrification and renewable power generation will sustain exports.

Chile: Economic growth and inflation indicators

1. Consumer Price Index excluding energy and food products.

Source: OECD Economic Outlook 115 database; and Central Bank of Chile.

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Chile: Demand, output and prices

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Monetary easing and moderate fiscal deficits are set to continue

As inflation is receding and expectations are firmly anchored at the target, the Central Bank will continue to cut its policy rate, reaching 4.5% by the end of 2024, and a neutral stance by mid‑2025. Fiscal policy will be moderately expansionary in 2024, with a central government deficit of 1.9% of GDP, but will tighten in 2025, reaching a deficit of 1.2% of GDP. Expenditure will follow the fiscal rule based on cyclically‑adjusted revenues. Support for the population and businesses affected by wildfires in early 2024, of around 0.8 billion USD (0.3% of GDP), will be financed with temporary tax measures. Revenue growth will benefit from strong demand for minerals in the medium term, and rising prices for copper over the forecast period, along with the new copper mining royalty estimated at 0.45% of GDP. However, revenues from mining contracts will be lower in 2024. Debt will remain below the 45% prudent threshold set by the government.

Growth will resume in 2024 and strengthen in 2025

GDP will grow by 2.3% in 2024 and 2.5% in 2025. Recovering real wages and looser short‑run financial conditions will support consumption growth. Subdued business expectations, volatile long‑term interest rates, and constricted credit supply will limit investment growth, which will depend mainly on mining and energy. Exports will grow on the back of sustained demand for minerals, while imports will recover along with consumption. Unemployment is expected to decline further in 2024-2025. Inflation will continue to fall and is projected to reach the target by mid-2025. Risks to the outlook remain on the downside. A stronger slowdown in China could reduce demand for minerals, hurting Chile’s exports and growth. Climate-change induced extreme events, such as a stronger drought or more widespread wildfires, could hurt crops and mining and damage infrastructure, reducing growth, and requiring fiscal support. Political fragmentation may lead to an impasse in much-needed reforms.

Cutting red tape and reforming the tax system can spur more inclusive growth

Competition and entrepreneurship are stifled by lengthy and complex regulatory procedures. Reviewing the stock of regulations, moving to “zero-licensing” schemes and digital procedures whenever possible, along with higher spending in research and development, can help increase productivity and growth. Chile’s tax intake as a share of GDP is comparatively low in the OECD. Making the tax system greener and more progressive while also improving tax administration can make room to increase social spending to significantly reduce inequalities, and to fund green projects that support decarbonisation goals.