Chile: Better Economic Prospects

Executive Summary

For many decades, Chile was the darling of capital markets and the strongest performer in South America. However, as the years of double-digit economic growth in China are over, economic growth in Chile has slowed considerably over the past several years. As Chile has noticeably benefited in the past from the strong economic growth in China, the country needs to reinsert itself in the global economy with less reliance on China. The Chilean economy had a very good track record prior to the eruption of China as the engine of commodity-driven economies. Thus, we believe that the country's authorities need to refocus the country on what it was doing right before 2000.

It will not be easy to refocus the economy, as competition in the global economy is stronger today, but Chile has a stable political system and strong institutions. This still will be no small feat in a region that is still going through growing political pain.

Chilean Economy Started to Improve at the End of 2017

The Chilean economy showed another disappointing performance in 2017, growing just 1.5 percent for the whole year. The only reason why this performance was an improvement compared to 2016, was that the growth number for 2016 was revised down to 1.3 percent from 1.6 percent. The manufacturing sector's growth in 2016, was revised to a decline of 2.4 percent from a previously reported decline of 0.9 percent. On the demand side, the revision was allocated fundamentally to personal consumption expenditures, which were revised to an increase of 2.2 percent in real terms in 2016 compared to a previously reported increase of 2.4 percent. There was also an upward revision to real imports of goods and services in 2016, to an increase of 0.2 percent from an originally reported decline of 1.6 percent. Recall that imports enter in the calculation for gross domestic product (GDP) with a negative sign.

Most of the supply side weakness in GDP in 2017 was due to a weak mining sector during the first half of the year, but especially in the first quarter when mining GDP collapsed 17.4 percent on a year-over-year basis. As the year progressed, mining GDP recovered somewhat but was still down 2.0 percent for the whole year. Some of the growth in mining has probably been driven by still strong copper prices (Figure 2). On the other hand, the first half of 2017 was relatively weak for non-mining GDP, growing 1.1 percent year-over-year during the first two quarters. Non-mining GDP, however, increased 2.0 percent in Q3 and 2.9 percent in Q4, capping the year as a whole up 1.8 percent.

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