Chile has been one of Latin America’s fastest-growing economies in recent decades, enabling the country to significantly reduce poverty. Between 2000 and 2015, the population living in poverty (on US$ 4 per day) decreased from 26 percent to 7.9 percent.
Between 2014 and 2017, growth slowed owing to declining copper prices, which negatively affected private investment and exports. Growth recovered in 2018, with a rate of 4.8 percent in the first half of the year, reflecting the rise in consumption and private investment driven by higher wages, lower interest rates and more private-sector confidence. Manufacturing also improved in 2018 thanks to higher copper prices and mining production. Non-mining activities, particularly wholesale trade, commercial services and manufacturing also progressed.
The fiscal deficit is expected to decline gradually beginning in 2018. Fiscal policy has been counter-cyclical in recent years. Sluggish economic growth and lower copper prices had a negative impact on fiscal income at the same time that the government increased spending, reaching a deficit of 2.7 percent of GDP in 2017. The economic recovery and compliance with the fiscal rule should lead to an estimated deficit of 2 percent of GDP in 2018. This gradual economic strengthening is supported by the fiscal austerity measures recently announced by the Treasury Department, which includes spending cuts equal to 1.6 percentage points of GDP in four years. Additionally, a tax reform bill was recently introduced in Congress to facilitate tax collection and promote investment. Total public debt is expected to reach 25 percent of GDP in 2018, compared with 23 percent in 2017, but it is still low compared with other Latin American countries.
Growth of GDP is expected to peak at 4 percent in 2018 to subsequently fall to 3.3 percent in 2020. This minor slowdown is associated with gradual adjustments in monetary and fiscal policy, combined with a less favorable external environment, stagnant copper prices and low global growth. The current account deficit is expected to grow to 2 percent of GDP in 2018 and to remain stable in 2019-2020. This increase reflects the rise in imports due to expanding investment and consumption that exceeds the increase in exports owing to higher international copper prices.
Responsible macroeconomic and fiscal management provides a solid base for more inclusive growth. To achieve this potential, however, Chile needs to build consensus to respond to the expectations of a growing middle class at the same time it increases economic growth potential. In the short term, it is crucial to recover the trust of the private sector to stimulate investment in sectors in addition to mining. In the longer term, the country must address structural challenges to promote productivity, improve energy provision, reduce dependence on mining and increase access to and quality of social services.
Last Updated: Sep 24, 2018