OECD Economic Outlook November 2019 Country Note, Chile

100 

Chile Economic growth is projected to strengthen gradually in the coming years, but remain weaker than previously expected due to the recent social events and persistent external headwinds. Supportive financing conditions and a tax reform in 2020 will sustain investment. Solid private consumption is set to be supported by low real interest rates and rising wages. Stronger growth and sustained immigration will boost employment. The current account deficit will remain stable.

Monetary policy will stay appropriately accommodative and start tightening at a slow pace as inflation approaches the 3% target and the output gap closes. Fiscal policy needs to strike a balance between higher social spending needs and remaining prudent to comply with the fiscal rule. Fostering inclusive growth requires reforms to strengthen social and active labour market policies and boost business dynamism.

Domestic demand is driving growth Economic activity slowed down in 2019 amid weather-related shocks to mining, weaker manufacturing output and lower export growth. The recent social unrest is weighing on consumption and investment. The labour market remains subdued with conflicting indicators. While administrative data point to healthy formal employment growth, the unemployment rate has not eased, as the labour market has not been flexible enough to accommodate the recent immigration wave. External conditions have worsened, as escalating trade conflicts and trade policy uncertainty have hit world trade. Inflation remains close to 2%, the lower band of the target range, partly reflecting a continuous drop in the prices of services.

Chile Investment and consumption are driving growth

Inflation remains low

Contributions to real GDP growth % Pts 14

Y-o-y % changes 6

Real GDP growth

Headline inflation

12 10

Private consumption

Core inflation¹

Government consumption

Inflation expectations²

8

Investment

6

Net exports

5 4

4

3

2 0

Inflation target range

2

-2 -4

1

-6 -8

2010

2012

2014

2016

2018

2020

0

0

2014

2015

2016

2017

2018

2019

0

1. Core inflation includes all items except energy and fuels.

2. Inflation expectations 23-months ahead.

Source: Central Bank of Chile; and OECD Economic Outlook 106 database.

StatLink 2 https://doi.org/10.1787/888934045145

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

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Chile: Demand, output and prices

2016

Chile GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Consumer price index Private consumption deflator Unemployment rate (% of labour force) Central government financial balance (% of GDP) Current account balance (% of GDP)

2017

2018

2019

2020

2021

Percentage changes, volume (2013 prices)

Current prices CLP billion

169 469.5 107 417.2 23 361.9 38 544.7 169 323.8 - 887.1 168 436.7 47 722.4 46 689.6 1 032.8

1.5 3.0 4.4 -2.7 1.9 1.0 3.0 -1.2 4.8 -1.6

4.0 4.0 2.2 4.6 3.9 0.9 4.8 5.1 7.6 -0.6

2.2 2.2 2.7 4.1 2.7 -0.5 2.3 -2.3 -1.8 -0.1

2.4 1.3 2.9 3.7 2.1 -0.3 1.8 1.5 0.8 0.2

3.5 3.4 2.9 4.4 3.5 0.0 3.5 3.0 2.8 0.0

_ _ _ _ _ _

4.8 2.2 2.7 6.7 -2.7 -2.2

2.0 2.4 2.0 7.0 -1.7 -3.1

2.6 2.4 2.3 6.8 -1.7 -3.6

3.0 2.5 3.0 6.7 -1.6 -3.4

2.6 3.0 3.0 6.2 -1.4 -3.1

1. Contributions to changes in real GDP, actual amount in the first column.

Source: OECD Economic Outlook 106 database.

StatLink 2 https://doi.org/10.1787/888934046228

Achieving higher and more inclusive growth hinges on continuing reforms The central bank has lowered the monetary policy rate from 3% at the beginning of the year to 1.75% at present, in part reflecting weaker-than-expected inflation and activity. Monetary policy is projected to remain accommodative until the 3% inflation target is achieved and the labour market strengthens.

The fiscal stance is broadly appropriate, with the planned gradual consolidation in line with the fiscal rule.

The planned fiscal reform, currently being discussed in the legislative assembly, would boost revenues by increasing the personal income tax and the property tax for high-income households. The reform would also spur investment thanks to a simplified tax code for SMEs and accelerating depreciation. Recently announced policy measures to further increase social expenditures, primarily publicly-funded pensions and an increase in the minimum wage for the most vulnerable, have been appropriately accommodated within the fiscal rule and will sustain private consumption.

Stronger and more inclusive growth requires keeping up structural reform momentum. Reducing labour market segmentation between stable and precarious jobs and integrating the recent flow of migrants, streamlining licensing and regulations, and increasing competition in network services remain key. The government has a welcome agenda to boost business investment mainly through administrative changes to help with licensing and procedures for big projects, the extension of bankruptcy law to smaller companies, the legal recognition of access to electronic signatures and the relaxation of requirements for hiring foreign workers. Further expansion of childcare facilities would boost still low female employment in paid jobs and help close the persistently high gender-wage gap. Easing regulations on open-ended labour contracts while extending unemployment insurance would tackle labour-market segmentation and reduce inequalities.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION Š OECD 2019

102 

The projected pick-up in growth is surrounded by considerable uncertainty Solid macroeconomic foundations and sustainable fiscal policy should help support growth despite the negative impact of the social unrest in the last quarter of 2019 and adverse external conditions. Supportive financing conditions, high copper prices, positive business sentiment and the planned tax reform should underpin investment. Low real interest rates and rising wages will continue to support private consumption, but government consumption and exports will remain muted. However, the projections are subject to considerable uncertainty due to the ongoing social unrest. The root causes of the unrest need to be tackled to boost households’ well-being and strengthen business confidence. Failure, or delay, to implement the needed ambitious social reforms would lead to weaker growth than currently projected. The subdued external environment, driven by trade tensions and regional instabilities, is also a downside risk. On the upside, full implementation of the ambitious structural reform agenda could raise investment more than anticipated.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019