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Chile Recession: Will Chile enter recession in 2023?

By Nicole Willing

Edited by Vanessa Kintu

15:14, 11 January 2023

Large Chile flag waving in the wind
Economists define a recession as two consecutive quarters of GDP contraction. Photo: Maxim Studio / Shutterstock

Falling copper prices and political unrest weighed on the economy of Chile, the world’s largest copper producer in 2022, increasing the prospect of a Chile recession in 2023.

Chilean gross domestic product (GDP) contracted by 1.2% in the third quarter from the second quarter – the fastest pace of decline in more than two years following a post-pandemic recovery. GDP expanded by just 0.3% from Q3 2021 and economists expect the economy to contract on an annual basis in 2023.

How is recession defined in Chile and what are the major drivers for the economy in 2023? We look at the latest Chile economic crisis and the country’s economic outlook.

How is recession defined?

Economists typically define a recession, which refers to a significant and prolonged decline in economic activity, as two consecutive quarters of GDP contraction. There are some measures that also take into account factors such as employment, industrial production and retail spending.

Economies tend to show signs of weakening for several months before a recession starts but the process of determining whether they are in a true recession rather than a slowdown in growth can take time.

Chile’s recession history as represented by GDP growth contraction shows that the economy is likely to enter recession for the second time in three years, following its most recent recession in the second and third quarters of 2020. The Chile crisis was driven lower by social protests in late 2019 and the impact of the COVID-19 pandemic on production and consumption.

Chile 10-year GDP chart

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Macroeconomic factors drive Chile’s GDP volatility

Services are the largest sector in Chile’s economy, accounting for more than 56%. Mining accounts for around 13%, led by the copper sector. Manufacturing activity makes up 12% of the economy and construction and water, gas and electricity distribution account for 11%. The government provides 5% of Chile’s economic output and the agriculture and fishing sector accounts for the remaining 3%.

Chile’s annual GDP growth rate averaged 3.75% from 1997 until 2022, with volatility spiking over the past three years. GDP growth dropped from 0.8% in 2019 to a 6% contraction in 2020, then rocketed to 11.7% growth in 2021. In 2022, quarterly growth declined from 7.4% in the first quarter to 5.6% in the second and 0.3% in the third.

The figures reflect that the economy recovered rapidly from the pandemic-related recession in 2021, but then came under renewed pressure from soaring inflation. The Central Bank of Chile has aggressively raised interest rates since July 2021 from 0.5% to 11.25% currently.

Chile 5-year interest rate chart

The economy has slowed down rapidly after the recovery from Covid-19 lockdowns, as the government has trailed off economic stimulus, consumers are feeling the effect of higher interest rates on household budgets, and businesses have held been holding off on investments as the country has yet to agree on constitutional reform following a failed referendum in September.

Inflation in Chile soared to 14.1% year-on-year (YOY) in August 2022 and stood at 13.3% in November, well above the central bank’s 3% target. The November rate was above October’s 12.8%, which had been an eight-month low and had prompted some economists to call for interest rates to begin moving lower in 2023.

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But the central bank stated in December that “inflation remains very high and its convergence to the 3% target is still subject to risks. The Board will maintain the MPR at 11.25% until the state of the macroeconomy indicates that this process has been consolidated.

“The most urgent and important macroeconomic challenge that the Central Bank of Chile had to address is inflation. Given that maintaining low and stable inflation is the main mandate of the central bank, this current situation undoubtedly represents the biggest test for the central bank at least since inflation targeting was adopted in the late 1990s,” said Chilean central bank governor Rosanna Costa in a speech in December.

Demand pressures began to grow strongly in 2021 while supply reactivated, as pension savings withdrawals and fiscal transfers climbed to around 30% of GDP, “feeding a huge imbalance in the economy and driving inflation upwards,” Costa said. 

The Chile crisis has seen a sharp depreciation in the value of the Chilean peso fuelled by the social unrest, political and economic uncertainty, increasing domestic inflation by raising the cost of imports.

What is the outlook for the Chilean economy in 2023 and beyond? How long could a Chilean recession last?

Chile recession: How long will the economy contract?   

The International Monetary Fund (IMF) indicated in its most recent Chile economic forecast in October that “GDP growth is projected to decline from 11.7 percent in 2021 to 2.1 percent in 2022 and turn negative at 1.3 percent in 2023, before returning to an estimated potential rate of 2.5 percent over the medium term.”

UK-based research firm Capital Economics also expected Chile's economy to contract by 1.3% year on year in 2023. The high rate of inflation and weak external positions mean that interest rates are likely to remain higher for longer in Chile, limiting upside for growth.

The Chile economic outlook from data provider Trading Economics projected at the time of writing (11 January) that the country’s GDP growth rate could rise to 0.8% by the end of the first quarter, but contract by 0.5% for 2023 as a whole. The economy could then return to growth in 2024, expanding by 2%, according to its econometric models.

The Organisation for Economic Co-operation and Development (OECD) also predicted that Chile’s economic growth could contract by 0.5% in 2023, compared with growth of 1.9% in 2022. The economy could then return to a growth rate of 2.6% in 2024.

“The economy will contract by 0.5% in 2023 and gradually strengthen in 2024. Inflation, tighter financial conditions, and low business confidence will hit consumption and investment during 2023, and weaker growth in trading partners will dampen export growth,” according to an OECD report. 

“Inflation will remain elevated throughout 2023, owing to the lingering effects of high energy prices, but the projected economic downturn and high interest rates will help bring it back to target. Risks appear tilted to the downside. Uncertainty about the path of reform for the Constitution could weaken business and consumer confidence.”

The report noted that weaker-than-expected economic growth in the country’s main trading partners – particularly China – would have an impact on exports and investment. But higher-than-assumed copper prices would give a boost to exports. A resolution to the constitutional reform process could increase confidence and attract more foreign investment.

If you are evaluating the prospects for a Chile recession to help inform your investing decisions, keep in mind that analysts and forecasters can get their predictions wrong. Before investing in any asset, we recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis and expert opinion.

FAQs

Is Chile in recession?

Chile’s GDP growth slowed to 0.3% in the third quarter of 2022, keeping it out of recession, but the economy is expected to contract in 2023 before returning to growth in 2024.

How long does a recession usually last?

Recessions typically last for less than a year, which can present opportunities for investors with long-term horizons to generate higher returns.

How often do recessions happen?

Research shows that economies are typically in recession around 10% of the time, based on the percentage of quarters in contraction, according to the International Monetary Fund (IMF).

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