May 22, 2013
The truth sinks in
As European stock markets bore witness yesterday, the economic outlook for 2012 worldwide is not much better than the Mayan prophesies of total Armageddon but Argentina has at least one extra cause for concern — that the inflation of the last five years becomes consolidated as stagflation. Against this panorama of downturn, the free-spending Cristina Fernández de Kirchner administration seems to think it can make a more credible claim for anti-cyclical policies than in bonanza years. Yet neither the devolution of transport subsidies to lower levels of government nor presidential resistance to raising the income tax floor suggest the expanded spending and the tax cuts typical of anti-cyclical policies in lean times — both seem as pro-cyclical as all-out spending during a boom. But to the considerable extent that public spending continues growing at the same pace (and the momentum is hard to reverse), the impact is inflationary — if 30 percent-plus growth in public spending accompanied by nine percent growth in the past couple of years has produced over 20 percent of inflation, what should we expect from the money supply still growing 30 percent when growth is a couple of percent at best?
One half of stagflation was officially recognized last Friday even if inflation denial continues to prevail in government circles — INDEC statistics bureau (which continues to insist on single-digit annual inflation and which managed to post a minimally positive growth rate for a highly recessive 2009) announced 0.5 percent shrinkage in economic activity for May, while last month’s industrial output slumped 4.7 percent in a model which prides itself on favouring the productive sector. Economists differ on whether this slowdown is largely homemade with the exchange and trade curbs of the last eight months crippling activity or whether it mostly reflects the global trend but not even INDEC is disputing that there is a slowdown.
In many ways it is too late for anti-cyclical policies because the damage is already done — Argentina seems doomed to the weakest economy and highest inflation in Latin America because Brazil and other countries which applied self-restraint during the boom years now have a margin to reflate which is lacking here. But a creeping official recognition of reality (not only the slowdown but also of the transport subsidy bubble and the midyear bonus crisis in Buenos Aires province) is at least a start — problems cannot even begin to be solved while their very existence is not admitted.