Chile: infections, vaccines and the recovery - Capital Economics
Latin America Economics

Chile: infections, vaccines and the recovery

Latin America Economics Update
Written by Nikhil Sanghani

While Chile is currently battling with a severe wave of virus cases, we remain cautiously optimistic about the resilience of the economy in Q2, and the prospect of a vaccine-related boost to output over the second half of this year. As a result, we are sticking with our above-consensus GDP growth forecasts.

  • While Chile is currently battling with a severe wave of virus cases, we remain cautiously optimistic about the resilience of the economy in Q2, and the prospect of a vaccine-related boost to output over the second half of this year. As a result, we are sticking with our above-consensus GDP growth forecasts.
  • Chile has won many plaudits for its world-leading vaccination program, but the country is currently in the midst of another severe wave of COVID-19 infections. (See Chart 1.) Some local health experts have pinned this on the emergence of more contagious virus strains (such as the Brazilian P.1 and UK B.1.1.7 variants), as well as a premature easing of containment measures last month.
  • The worsening virus outbreak is putting significant strains on the healthcare sector, with ICU occupancy alarmingly high at 95%. (See Chart 2.) Stringent restrictions have been imposed in recent weeks with around 85% of the country in a full lockdown. This includes limits on travel and non-essential activities, which has led to a steep drop in the recent high-frequency mobility data. (See Chart 3.)
  • While there is still a lot of uncertainty, and downside risks are growing, we remain cautiously optimistic about Chile’s economic outlook. For one thing, the economy seems to have become increasingly resilient to lockdowns. Indeed, when restrictions were imposed at the start of this year, the official economic activity index (Imacec) rose by 0.9% m/m. (See Chart 4.) That was helped by businesses adapting to social distancing measures and key sectors, including mining, remaining open. The current lockdown is more severe, but we suspect that the same factors will help to cushion the blow to output.
  • What’s more, it still seems too early to dismiss the impact of vaccines. Chile’s inoculation drive has been impressive, with 60 doses per 100 people administered – more than the US and the UK. But there is still a long way to go. Data from the Health Ministry shows that the vast majority of citizens over the age of 60 have been fully vaccinated (with two doses), but the share is just 22% for the population as a whole. (See Chart 5.) Note that, in Israel’s case, around 30% of the total population had been fully vaccinated when new virus cases began to drop sharply and restrictions started to ease. (See our Emerging Markets Update.) And Israel has been using the Pzifer jab, while Chile is mainly rolling out the less effective Sinovac vaccine.
  • There is already some tentative evidence that vaccines may be starting to have a positive effect in Chile. Unlike for the rest of the population, new infections for those above the age of 70 are dropping back. (See Chart 6.) And there has been an even more notable decline in ICU hospitalisations for this group. (See Chart 7.) This is the age cohort where vaccination is most widespread.
  • Accordingly, while the latest developments cloud the near-term economic outlook, it may just be that Chile’s vaccination programme needs more time to help to reduce health strains more substantially. Given the current pace of vaccination, that point may not be too far off, with the government on track to hit its target of inoculating 80% of the population by the end of Q2. As a result, our baseline assumption is that most lockdown measures will start to be lifted later this quarter.
  • As and when restrictions do ease, there is room for private consumption to expand rapidly. Substantial fiscal support, alongside two rounds of pension withdrawals, has bolstered household spending over the past year. And this trend has further to run. Policymakers recently enacted more stimulus worth 2% of GDP, and fiscal policy looks set to remain accommodative over the coming quarters. Moreover, analysis by the central bank showed that around two-thirds of the funds withdrawn from private pension accounts last year, worth over 7% of GDP, are still in bank and savings accounts. There is therefore a lot of scope for consumers to draw down savings and release pent-up demand when lockdown measures are lifted.
  • Finally, it’s worth bearing in mind that the rapid pace of recovery in late 2020 and early 2021 means there is a large statistical carryover that will push up the 2021 GDP growth number. Taking this all into account, for now, we are sticking with our view that Chile’s GDP will expand by 9% this year, and 4.5% in 2022. Our projections lie head-and-shoulders above those of the consensus, Chile’s central bank and the IMF.
  • To put this into perspective, our forecasts imply that Chile’s GDP will return close to its pre-pandemic trend around the end of 2022. (See Chart 8.) In the IMF’s latest World Economic Outlook, the Fund expects that most advanced economies will see little economic scarring from the pandemic due to accommodative fiscal policies and the rapid rollout of vaccines. We think that this line of reasoning also extends to Chile.

Chart 1: New Daily COVID-19 Cases (7d Ave., Thsd.)

Chart 2: ICU Occupancy (%)

Chart 3: CE Chile Mobility Tracker (% Difference from Jan. 6– Feb. 2020 Median, 7d Ave.)

Chart 4: Monthly Economic Activity Index
(Imacec, Feb. 2020 = 100)

Chart 5: Share of Population Vaccinated By Age (%)

Chart 6: New Daily COVID-19 Cases by Age (7d. Ave, Index, 13th Jan. 2021 = 100

Chart 7: ICU Hospitalisations by Age
(Index, 13th Jan. 2021 = 100)

Chart 8: Real GDP (SA, Q3 2019 = 100)

Sources: Refinitiv, Our World in Data, MinCiencia, Capital Economics


Nikhil Sanghani, Latin America Economist, nikhil.sanghani@capitaleconomics.com