Chile is one of the most economically developed countries in Latin America and is included in the group of high-income countries, according to the World Bank classification. Before the COVID-19 pandemic, the republic's GDP increased annually by an average of 2%, and the population by 1%.
The main driver of Chile's economic growth in recent years has been the export—oriented mining industry - large deposits of copper, molybdenum, iron and other minerals are actively being developed in the country, as well as carbonates and other chemical products are produced in significant volumes.
The Republic also has significant potential in the field of "green" energy, which is facilitated by the presence of its own large reserves of non-ferrous metals. Moreover, the cost of generating electricity from renewable sources in Chile is relatively low due to the significant level of solar radiation in the north of the country and strong winds in the south. The environmental policy pursued by the national Government, aimed at introducing "green" practices in order to achieve sustainable development goals, gives additional impetus to the Chilean economy, especially in the context of global climate change.
After a 6.1% reduction in real GDP in 2020 due to the COVID-19 pandemic, Chile demonstrated rapid recovery rates due to the low base effect: in 2021, economic growth amounted to 11.3%. In 2022, a more moderate value of 2.1% was observed. The decrease in the growth rate of national GDP was facilitated by the high level of inflation and the tight monetary policy pursued in this regard. In addition, income inequality has been a problem in the country for a long time: as of 2022, the Gini coefficient in Chile was 0.43. Unemployment is also at a high level — 9.0% in 2023. These problems limit the social mobility of the country's residents, which becomes a significant obstacle to further economic development.
By 2023, the GDP growth rate of the republic decreased to 0.2%, including due to low domestic demand, as well as reduced revenues from copper and lithium exports. Nevertheless, in the medium term, growth in the Chilean economy is expected to recover to more than 2% annually due to the projected stabilization of inflation within the target range, easing of monetary policy, as well as the establishment of a more favorable market environment for metals.
However, risks also remain, primarily related to the prospects of increasing demand for Chilean-made products in China and the United States, which are Chile's main trading partners. In addition, the effects of the onset of the Southern oscillation phase of the natural phenomenon of El Nino (an abnormal increase in surface water temperature in the Pacific Ocean, leading to changes in weather conditions around the world) may have a negative impact on the country's economy.
As in many countries, the local peak of inflation in Chile occurred in 2022, when prices increased by 11.6%. In this regard, the Central Bank of the country has begun a gradual tightening of monetary policy: from July to October 2022, the key rate in the country was increased by 1,075 bps to 11.25% and remained at this level until July 2023. The decrease in the rate of price growth recorded in 2023 allowed the regulator to begin the process of easing monetary policy. From July 2023 to October 2024, the key rate in Chile was reduced by a total of 600 bps to 5.25%. According to the results In 2023, inflation was 7.6%.
However, serious pro-inflationary factors remain in the country, restraining the trend towards lower prices. Thus, inflation began to rise in March 2024 against the background of the depreciation of the national currency and an increase in electricity tariffs, which have remained frozen since 2019. Against this background, the Central Bank of Chile temporarily suspended the rate cut process. Nevertheless, with the return of the disinflationary trend in the summer of 2024, the regulator resumed its policy of easing monetary policy.
Inflation in Chile is projected to reach 3.9% by the end of 2024, but in the short term its level may exceed 4%, including due to further adjustments to electricity tariffs. The World Bank and the IMF expect that price growth in the republic will return to the target value set at 3% in 2026. At the same time, core inflation, excluding volatile goods such as food and energy, remains at a moderate level in the country, which makes it possible to predict the continuation of the Chilean central bank's policy of lowering rates until price growth stabilizes within the target range.