What a couple of months ago was just a suspicion, has now become a certainty. The Argentine economy is heading inexorably towards a recession, which could even be the most severe since 2009. With each passing week the calculations are corrected downwards, given the confirmation of a very negative scenario from whichever way you look at it. The historical drought suffered by the Argentine countryside dominates all projections. The phenomenon was considered a “black swan” by Portfolio Personal Inversiones (PPI) in a report to its clients. This means that it is something that was not in the calculations a few months ago. Although it was known that the lack of water would cause problems, not even the most pessimistic expected this scenario, considered dramatic at this point.
PPI notes that the country will run out of a trade surplus this year, while imports will suffer a pruning of at least USD 11 billion. “The drought will have a direct impact of 2.1% on GDP. But to this must be added that the clamps on imports will intensify, with an impact that is difficult to quantify. The latest calculations indicate that the GDP could suffer a fall of 3%, although the danger is that it will continue to be revised downwards.
The last five months of 2022 were recessive, with falls month by month, and the start of 2023 would not show a reversal of this trend. But the most worrying thing comes later, after a drought that would hit the GDP level by 2% this year
The economy grew 5.2% in 2022. But that expansion had the particularity that almost everything was concentrated in the first semester, continuing with the post-pandemic rebound of 2021. On the other hand, the last five months showed consecutive falls, in the level of activity. Everything indicates that this trend will be accentuated in these first months of the year. And going forward there are no signs of improvement, quite the opposite.
In addition to the effects that are beginning to be palpable from the drought on activity, there are other elements that will play against it in 2023, with the consequent impact on the presidential elections. These are some of the most relevant:
-Inflation does not loosen and impacts wages: The start of 2023 could not have been worse, with increases of over 6% in the index and increases of 9.8% in food only in February. It is inexorable that this will have a negative impact on income, which continues to lose purchasing power. This effect was felt less in 2022, because the fall in wages was offset by the increase in employment, especially in the informal sector. But this year the drop in economic activity will play against the creation of jobs, to which will be added the drop in income in real terms.
-The interest rate would be adjusted upwards: The Central Bank must make a decision at today’s board meeting, but there are high chances that it will have to increase them given the new impulse of inflation. This implies a higher cost for companies and an increase in the cost of credit, which will also impact the public when it comes to financing with a credit card or personal loans.
-Electoral uncertainty: The proximity of the elections does not favor economic activity. This happens because investment or purchase decisions are postponed pending the results of the elections. It is a classic phenomenon in Argentina, which is also characterized by an increase in dollarization and consequent pressure on the exchange market in the months prior to the elections. These trends are even exacerbated by the PASO, which takes place in early August.
-Convulsed international context: Banking crises are now added to the sharp rise in interest rates in developed markets, first in the United States with Silicon Valley Bank and then with Credit Suisse in Europe. All this generates a greater outflow of funds from emerging markets, causing a sharp rise in country risk and making financing possibilities difficult for companies.
Keep reading:
Exchange rate gap, drought, inertia and the heat wave: why the Economy believes that inflation accelerated in February
The inflation data forced the Central Bank to review the management of the official dollar and the interest rate
Rising inflation: for economists the March index could be close to 7 percent
The dilemma of the Central Bank: if it raises rates, it will also make its own debt more expensive
