The government recently became convinced that the economy is entering a recession due to three key factors. These include a reduction in the deficit, signs of a decrease in inflation, and a collapse of private credit. These indicators started to reflect the impact of the shock plan on consumption, activity, and investment at the beginning of the year.
Inflation rates had been soaring, with 30% in December and 20% in February. Despite initial predictions that people would not accept such an increase, they are doing so. The Central Bank revealed that there was a significant collapse in peso loans to the private sector, which was attributed to factors such as high inflation and negative rates policy that led to reduced fixed-term lending by banks.
During his inauguration speech, Javier Milei, Minister of Economics, acknowledged challenging times ahead but expressed hope for improvement. However, recent data showed otherwise – there was a 5% year-on-year fall in economic activity in December. Construction and automotive production also declined significantly along with layoffs and suspensions due to diminished sales and commercial debts.
Different sectors like tire industry and investments also presented negative trends and considerable declines in activity, reflecting the deepening economic downturn. Economists consulted by the Central Bank expect a contraction in the economy of 3%, accompanied by an increase in unemployment rate. The concern is whether the government will be able to lower inflation with potential devaluation further accelerating prices if deficit is not reduced.
Overall, it seems that despite some initial optimism from ministers like Luis Caputo and Javier Milei, Argentina’s economy is facing significant challenges with high inflation rates leading to decreased economic activity across various sectors.