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Chile Sees Improved Economic Outlook
Aggressive vaccination, sky-high copper prices and stimulus boost growth.
BY LATIN AMERICA ADVISOR
Inter-American Dialogue
Chile’s government this month revised its economic growth outlook for this year to 7.5 percent, up from a previous forecast of 6 percent. However, it expects the economy to expand 2.9 percent in 2022, down from an earlier estimate of 3.5 percent. What are the most important factors driving Chile’s economic outlook for this year and next year? What are the biggest headwinds facing the Chilean economy in the period ahead? How big of a role has the country’s rapid pace of vaccination played in the country’s economic recovery?
Mariana Zepeda, Latin America analyst at FrontierView: A few short-term factors are driving Chile’s faster-than-expected 2021 rebound: an aggressive vaccination campaign, sky-high copper prices and expanded fiscal stimulus. However, Chile is not out of the woods. On the Covid-19 front, risks remain that new variants could disrupt Chile’s emergence from the pandemic despite high vaccination levels. While higher mobility levels are bound to bolster economic activity in the second half of this year, fiscal stimulus will eventually fade out and with Chileans largely tapped out on pensions savings, consumption levels should begin to moderate. Export revenues from copper are likely to slow into 2022 as well, further raising fiscal risks. This means Chile will need private investment to continue to bolster its recovery momentum and propel labor market recovery, which has stalled in recent months. But an uncertain political environment may complicate that investment recovery. Chile is entering a pivotal moment amid a long-awaited constitutional process that could alter the country’s political and economic model. The Nov. 21 presidential election is approaching, and recent Constituent Assembly elections and presidential primaries signal that Chilean voters are shifting left and away from the political establishment. High levels of political uncertainty will persist beyond the elections. Political noise is likely to weigh on investment levels as the constitutional process unfolds, addressing sensitive topics such as the pension system or the government’s role in providing social services. While our view is that uncertainty will gradually dissipate in the long run and that Chile will remain one of the most competitive countries in Latin America, the country’s medium-to-long-term economic growth could hinge on decisions made over the next few months.
Alfredo Coutiño, director for Latin America at Moody’s Analytics: Chile has shown a rapid recovery after the plunge caused by the Covid-19 crisis in 2020, which has been driven by strong external demand and progressive domestic reopening. The economy in the first quarter of 2021 put production at a level above the pre-pandemic volume reported at the end of 2019. However, the volume of production is still one percentage point below the peak in the third quarter of 2019. The recovery’s main driver has been the solid advance of the world’s two main locomotives (China and the United States), which are important consumers of Chile’s exports. The domestic market is a second driver, which keeps gaining traction as the economy reopens, thus reabsorbing spare labor. The domestic market is also supported by the mitigation policies that the government and the central bank have implemented. The acceleration of the vaccination process has reinforced confidence and improved Chile’s business climate and prospects. All this supports an economic rebound of between 7 percent and 7.5 percent in 2021, a growth rate amplified by the arithmetic effect generated by the low comparison base in 2020. Moreover, the recovery has already moderated to rates more consistent with the economy’s capacity, which will bring growth in 2022 to a rate in the range of 3 percent and 4 percent. The country is facing two main risks, which could slow the recovery. First, the new wave of infections caused by new virus strains could introduce mobility restrictions and partial business interruptions. Second, the steady increase in inflation already forced a change in monetary plans, triggering an earlier policy normalization. A persistent inflation trend could force a faster monetary normalization that could cause a sudden market adjustment and affect consumption and investment decisions. Therefore, the recovery is not free from risk.
Dorotea López Giral, director of the Institute of International Studies at the University of Chile: The crisis in Chile caused by the pandemic has overlapped with the effects of social protests, the future of a new constitutional framework and an acutely polarized political situation. Therefore, the real equation of economic performance must incorporate health-related variables, the capacity to add value to our products and recover employment and the ability to democratically consider the central questions that Chileans have raised since October 2019 about the country’s institutions, its social contract and its economic model. Women have been the most affected in today’s global context, and there are many uncertainties about their future. The uncertainties at the national level will start to dissipate when solutions surrounding employment issues are put in place, particularly for low- and middle-income women who have been affected. There will also be more clarity when the constitutional process settles after an unsteady start. Several variables show a high potential for a number of conflicts to emerge, creating an uncertain environment. These include a resurgence in protests, a slowing of the vaccination process and the emergence of new virus variants. Among the many challenges that the pandemic has highlighted is the urgent need to improve income distribution through addressing the provisional health and educational reforms. Chile must continue to implement more public policies and adopt a digital paradigm for its long-term growth, particularly among women. If external conditions are favorable, meaning more economic dynamism in China and the United States, the main challenges will be to stabilize the national scenario and give priority to addressing the gender gap.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor
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