The economy of Chile is expected to face several challenges in 2023, including lower copper production, fluctuations in commodity prices, high inflationary pressures, strict monetary policies, and low business confidence. These factors are likely to have a dampening effect on investments and domestic demand, resulting in subdued economic activities. Additionally, the global economic slowdown is anticipated to negatively impact external demand and trade prospects. Subsequently, the Chilean economy is set to contract by 0.3% in 2023, in contrast to the growth rate of 2.4% experienced in 2022, forecasts GlobalData, a leading data and analytics company.

GlobalData’s latest report, “Macroeconomic Outlook Report: Chile,” reveals that Chile, responsible for approximately one-third of global copper production and heavily reliant on copper exports, is expected to experience economic repercussions due to the decline in copper production and fluctuating prices in 2023. Chile’s Codelco, the leading global copper supplier, faced setbacks in Q1 2023 with a drop in both production and sales. Codelco anticipates a production loss of approximately 7,000 metric tons of copper in 2023 because of recent heavy rainfall.

In Q1 2023, Chile’s economy contracted by 0.6% on a quarterly basis, with a decline in household consumption and fixed investment. Output decreased at a slower pace in various sectors, including transportation, trade, finance, construction, and manufacturing. The mining sector contracted slightly less, benefiting from growth in other mining activities.

Puja Tiwari, Economic Research Analyst at GlobalData, comments: “Following the onset of the rate hike cycle in June 2021 to combat inflationary pressures, the Central Bank of Chile has raised the policy rate in 11 consecutive instances, resulting in a cumulative increase of 1,075 basis points until June 2023. Consequently, Chile’s annual inflation rate reached a 1.5-year low of 7.6% in June 2023. Although it remains above the Central Bank’s target range of 2% to 4%, the significant deceleration from the highs observed in 2022 indicates the potential for rate cuts. Such cuts could have a positive impact on business and investor confidence.”

Sector-wise, mining, manufacturing, and utility activities contributed 27.4% towards the gross value added (GVA), followed by wholesale, retail, and hotel activities (12.4%), and transport, storage, and communication activities (6.6%) in 2022, according to GlobalData. The three sectors are forecast to grow by 4.6%, 6.3%, and 3.1%, respectively, in 2023 as compared to 9.4%, 9.2% and 9.0%, recorded in 2022.

Chile’s $13.3 billion transport infrastructure development plan, introduced in October 2022, includes 52 projects that are expected to boost growth in the construction and related sectors. GlobalData forecasts the construction sector’s GVA to expand at an average annual rate of 7.3% from 2023 to 2025.

Chile, as part of the Lithium Triangle*, possesses almost 60% of global lithium resources, offering significant potential. While high lithium prices present challenges, refining, and processing strategies can enable Chile to generate increased revenue by meeting the rising demand for batteries.

Chile’s copper sector is also expected to record significant growth in the coming years with seven major projects anticipated to start operations in 2023. These projects, with over $11 billion in investment, aim to achieve an annual production of nearly 700,000 tons. Although the Rajo Inca project experienced delays, pushing its production start to H1 2024, the overall outlook for the copper sector remains optimistic.

Chile is categorized as a low-risk nation and ranks 34th out of 153 nations in GlobalData Country Risk Index (GCRI Q1 2023). The country’s risk score is lower in various parameters, including macroeconomic, political, legal, demographic, and social structure, technology, and infrastructure as well as environment compared to the average of Latin American nations in Q1 2023.

Tiwari concludes: “While the forecasted economic contraction in 2023 poses challenges, it is essential to approach the situation with a long-term perspective and focus on sustainable recovery. The government’s efforts to boost infrastructure development, particularly in transport and construction, provide opportunities for growth. The country’s significant lithium and copper reserves also position it to capitalize on the growing demand for these resources in various industries.”

Note: Lithium Triangle refers to the region encompassing the lithium reserves located in Argentina, Bolivia, and Chile.