Finance Minister raises Chile’s growth forecast to 4% in 2022, dismisses risk of recession

RIO DE JANEIRO, BRAZIL – Chile’s Gross Domestic Product (GDP) is likely to grow between 3% and 4% next year, according to one of the country’s top economic authorities, who dismissed concerns about a recession.

The country is still benefiting from support measures implemented to deal with the coronavirus pandemic and retains plenty of liquidity in the markets, Finance Minister Rodrigo Cerda said in an interview with Bloomberg TV.

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“Next year, we are going to normalize fiscal policy, growing from 3% to 4%,” Cerda said. The minister added that there would be a persistent “growth impulse” from public spending.

For reference, in the last Public Finance Report in October, the portfolio anticipated activity growth of 2.5% for 2022.

The comments downplay the risks flagged by banks, including JPMorgan, that the economy could contract next year and that the close presidential election complicates the political landscape.

CONVERGENCE TO THE CENTER

“What I see now is that both parties are trying to move to the center, which is good news for our economy and society,” Cerda said. “People are looking for votes from the center, and we will be looking for more moderation.”

The University of Chicago economist monitors Chile’s breakneck recovery, where GDP could expand about 11% this year. Still, growth has been driven by a temporary stimulus implemented during the pandemic that is now tapering off. Meanwhile, the upcoming presidential runoff and the drafting of a new constitution add to the uncertainty.

Cerda said the political landscape has calmed down since the last round of elections, in which the center-right gained support and more politicians moved to the center.

“In the future, we will see much more political agreement, more moderation in our political discussion,” the secretary of state said. “So, if we are going to make changes, they will be more gradual. These are big changes in the political arena. There is calm.”

The fiscal authority added that the new political landscape would make it easier to make tough decisions once they occur.

Since the pandemic, Chile has implemented direct cash transfers to families and businesses, employment subsidies, and special credit measures. On top of that, Congress approved three rounds of early withdrawals of pension funds that injected US$47 billion into the economy and even evaluated a fourth withdrawal’s approval.

Not all the consequences of the unprecedented measures have been positive. The Central Bank is now raising its interest rate to combat inflation, reaching a twelve-year high. While the government extended a labor subsidy program this week, it has signaled that it will end cash transfers.

ELECTIONS AND RECESSION

Looking ahead, the combination of higher borrowing costs and a sharp reduction in stimulus will likely push Chile into recession next year, according to analysts at banks such as JPMorgan and Banco de Credito e Inversiones. Political uncertainty further complicates the economic outlook.

On December 19, the electorate must choose one of the presidential candidates, leftist Gabriel Boric and far-right José Antonio Kast, in the most decisive vote since Chile’s return to democracy three decades ago.

Boric is a former leader of student protests who wants to raise taxes, improve public services and guarantee more equality. In contrast, Kast is a right-wing lawyer who wants lower taxes and more incentives for the private sector.

The new constitution will also determine the future of Chile’s pro-market economic model, which has driven decades of growth while increasing inequality. Work is currently underway on the document by a Constitutent assembly, and the final draft will be submitted to a national referendum next year on whether to accept it.