Crisis impact: the blow of austerity is being felt in almost all economic sectors

Economists largely agree that there won’t be a V-shaped recovery — there will not be a sharp rebound and the signs are worrying

President Javier Milei’s economic plan is focused on the financial front, with Argentina’s fiscal situation as its main target (going through the government’s “chainsaw” and “blender”) and reducing inflation by correcting relative prices and adjusting tariffs. 

But the production sector doesn’t seem to be on the government’s official agenda. Mass consumption has gone down as Argentine salaries lose buying power, which is affecting economic activity, which has in turn started to have consequences on employment.

The warning lights on the economic board are worrying. In the last few days, serious data on the fall of industry and construction have been released as well as mass consumption. The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) has already estimated that Argentina will be the only country in the region that will see a its economy contract in 2024. That contraction is expected to be more than 3%.

Economists largely agree that there won’t be a V-shaped recovery — there will not be a sharp rebound. The most optimistic ones speak more of a moderate rally. Others believe that when the fall slows down, the activity will continue to be flat near that floor.

Decreased productivity

The drop in income is reflected in economic activity. The National Institute for Statistics and Census (INDEC for its Spanish initials) reported a 3.7% drop in activity between December and February. The figure more than doubles the decline in all of 2023 due to the drought, despite the strong rebound in the agricultural sector.

In March, industrial production fell 21.2% interannually, while the construction activity index plummeted by 42.2%, according to INDEC data. In addition, retail sales recorded an average decrease of 16%. These indicators also showed setbacks compared to February, with a drop of 6.3% in industry and 14.2% in construction.

The consulting firm Facimex Valores compiled data corresponding to April which showed a 33% drop in the Construya index (sales of construction inputs by leading companies), a 21% drop in car production, and a 6% drop in vehicle registrations, among others.

On the other hand, the consulting firm ACM considered that “sectors more oriented to the domestic market were affected by the fall in domestic demand: the most tradable sectors did not manage to reverse this trend, the largest contractions were in equipment, devices, and instruments 37%; machinery and equipment 35.5% and basic metal industries 25.6%.”

Data from the latest survey of the Association of Automotive Manufacturers reflect the difficult situation the automotive industry is going through. “The drop in production, exports, and sales of cars is historic. Freezing the economy cannot be the solution to Argentina’s problems,” the report said.

The Argentine automotive production has not been able to recover and registered a new setback, falling by 21% in April compared to the same month of last year, while sales fell by 33.6% and exports by 32.9%.

In April, 42,974 vehicles were produced, a 0.4% drop in quantities compared to March, but 21.4% less than the 54,399 units produced in April last year.

When it comes to the foreign market, the report notes that 20,611 units were exported, 12.4% less than the March figure and 33% less than in April 2023.

“As we expected, in April the main variables of the sector continued to show an adaptation to the new economic reality,” said the association’s president, Martín Zuppi.

Zuppi also highlighted the decrease in car sales: 22,450 sales were made, 26% below March’s records. In the year-on-year comparison, 33% less was sold in April 2024 than in April 2023.

Demands, pushback, and support from the business community

Despite the circumstances, many businessmen fiercely support the direction Milei wants to sail toward. They mainly advocate a free market economy, in which the state has practically no intervention. But it is worth noting that some of those who applauded deregulation later protested.

Those who have benefited are those who bet on the financial market and many with real estate businesses. Almost all of them are united by their support for a labor reform that would limit current regulations.

A few days ago, the Board of Directors of the Argentine Industrial Union (UIA by its Spanish initials) analyzed the latest government measures regarding tariffs and expressed support for labor reforms in Milei’s so-called “omnibus bill,” which is set to be debated in the Senate.

They said that changing tariffs on industrial goods “should be in line with improvements in the macro-economy, lower tax pressure and recovery of the economic activity.”

“Because of these asymmetries, our country competes in unfavorable conditions with companies that face lower tax and logistics costs, have access to investment financing, and have better infrastructure,” said the UIA in a statement.

In addition, the sectorial and regional representatives expressed their concern about the drop in economic activity, the increase in energy costs, and the impact of the context, particularly for small and medium-sized enterprises.

Meanwhile, the government continues to have friction with different sectors. With the prepaid health insurance companies, it took the conflict to the courts. It is also trying to lower prices by exerting pressure on retailers. The new battle is with the energy companies: Economy Minister Luis Caputo, who has become Milei’s “champion” for each of these fights, wants to pay the multimillionaire bill owed by the state with a bonus that includes a 50% reduction.

Declining purchasing power of wages

Mass consumption fell by 20.4% interannually in April due to the persistent loss of purchasing power of salaried workers, which impacted the volume of retail purchases.

Compared to March, the decline in purchases was 17.1%, as shown by the survey conducted by the consulting firm Focus Market via Scanntech. The amount spent fell by 8.9% compared to the previous month and by 11.2% compared to 2023. Units per transaction declined 4.5% interannually to 4.2 units per ticket and 13.2% versus March 2024 to four units per transaction.

The wage index rose 10.3% in March and once again lost to monthly inflation, which was 11%. The indicator shows a  45.5% compared to December, when prices rose 51.6%. The monthly growth is due to increases of 10% in the registered private sector, 11% in the public sector and 9.7% in the informal private sector, according to the INDEC.

Goodbye, middle class

According to the Statistics and Census Bureau of the City of Buenos Aires, in April, a typical Buenos Aires family needed an income of over AR$1.26 million (excluding rent) to be considered middle class. If renting, that same family would have to have an income of over $1,500,000 per month.

Compared to a year ago, the poverty threshold increased 295.9% (from AR$208,569 to AR$825,809). This represents a higher increase than the city’s average year-on-year inflation which was 292.5%. Thus, inflation hit lower-income families the hardest.

With the deceleration of food prices and the heightened costs of tariffs and services, the value of the middle-class basic basket increased more than that of destitution and poverty.

Last month, in Buenos Aires City, there were marked increases in private and public services, which in greater proportion affect the middle class — which until recently represented half of the city’s population. Water supply (181.1%), gas and electricity (54.1%), financial services (25.9%), prepaid services (16%), education (15.1%), common housing expenses (15.7%) and information and communication (11.7%) increased.

In April, the family poverty basket was AR$825,809 in Buenos Aires City, a 7.8% increase compared to AR$766,146 in March.

The threshold to be considered middle class increased from AR$1.2 million to AR$1.3 million an increase of 9.3%.

On the other hand, due to the soaring food prices (especially bread, fruits, and vegetables), the destitution threshold rose from AR$290,411 in December to AR$350,564 in January, to $402,752 in February, to AR$442,239 in March and $467,177 in April: a 290.2% interannual increase.

With these values, if a modest rent is added to the family poverty basket (AR$825,809), what’s considered a typical family unit for statistical purposes (married couple with two minors) needed more than AR$1 million a month not to be poor.

The AR$825,809 poverty threshold exceeds not only the country’s minimum wage (AR$234,315 in April) but also the national average earnings of salaried workers (AR$705,833 in March).

The recovery begins?

A boost to the economy may come from the agricultural sector, with a harvest that will be substantially better than last year’s, when there was a historic drought that cost the agricultural sector — and the government — losses of over US$ 2.2 billion.

Within what can be seen as positive signs, the INDEC is expected to report an inflation rate lower than 10% on Tuesday.

Meanwhile, the consulting firm LCG pointed out that “some activity indicators show a slight rebound in April, although this is far from compensating the fall experienced in March. It is expected that the decline in activity, especially considering these magnitudes, will reach a minimum point. Having subordinated the economic recovery to the disinflation target, this suggests that the recovery in both sectors will be marginal.”

“However, austerity is likely to ease as inflation rates continue to fall. Our projection is an average annual drop of 14.7% in the case of industry and 31% for construction, the sector that is most affected by the drastic slowdown in public works and the decrease in the exchange rate gap, which implies a rise in costs measured in dollars,” concluded the consulting firm.
Originally published in Ambito


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