Chile has been one of the fastest growing economies in Latin America in the last decade, however the international crisis has hit its shores and since 2013 a gradual slowdown of its economic activity is being perceived. After the boom observed between 2010 and 2012, the GDP’s growth was reduced in 2,2% during the first semester of 2014 affected by a regression in the mining sector due to the end of the investment cycle and to the copper prices fall, this added up to a decline in private consumption. In parallel unemployment has increased from 5,7% in November 2013 to 6,5% in June 2014. However the increase in self-employment has partially dampened the effect over the unemployment rate.
As a result of the economic slowdown, the copper prices reduction, and the expansionist efforts the fiscal deficit is increasing. The mobile fiscal deficit of 12 months increased from 0,6% of the GDP by the end of 2013, to 1,1% of the GDP in June 2014, due to the lowest levy resulting from the weak internal demand and the copper fall. On the other hand, the government expects that the fiscal deficit approaches to 2,0% of the GDP by the end of the year due to the expected expansion of the fiscal expense in mining and construction.
The tax reform approved in September 2014 aims at increasing the fiscal expense by 3 percentage points of the GDP in order to finance the additional expense in education and to reduce the fiscal gap. The main element of the reform is to remove the Tax Utility Fund (FUT in its Spanish acronym), that is used by the companies to adjourn the tax payment over the benefits that are retained for the investments.
In this context, it is expected that the economic growth recovers in 2015. The Central Bank reduced its growth projection to place it between 1,75% and 2,25% in September 2014 from and between 3,75% and 4,75% in December 2013. As a result of the ongoing expansive monetary and fiscal policies the private investment recovery and the normalization of the current economic cycle, it is foreseen that the economic growth will rebound between 3,75% and 4,75% for next year.
During the last years Chile has achieved relevant reductions in poverty levels, as well as in the shared prosperity increase. The ratio of the population considered poor was reduced from 23% in 2000 to 9,9% in 2011. In addition, between 2003 and 2011 the average income of the 40% of the poorest expanded in approximately 4,3%, which is considerably higher than the average growth of the global population (2,5%).
Notwithstanding, Chile is still facing relevant challenges. The robust macroeconomic and fiscal performance provides a solid base to support and to increase its expansion rate in the medium and long run, and to achieve a more inclusive growth. Yet despite the robust growth during the last 20 years, the per capita income of the country has still to converge with that of nations with a higher income (in 2012 the per capita income of US$21.990 was still far below the average of US$30,036 of the OECD countries). On the other hand, the structural challenges to boost productiveness and to improve the access and quality of the social services should be addressed for a more inclusive growth. Ultimately the energy deficiency and the dependence on the copper exports remain a source of vulnerability.
Last Updated: Nov 05, 2014