Analysts warn that devaluation, uncertainty will affect growth

The drought is also expected to continue affecting the economy in the upcoming months

According to information released by the National Institute for Statistics and Census (INDEC, for its Spanish initials), economic activity in May registered two consecutive months with a negative growth. Given that the drought will continue to be a factor in the coming months, consulting firms estimate the data for June, which will be released this Wednesday, will also show an economic downturn.

Going forward, the outlook is not encouraging. Analysts warn that the devaluation, added to the uncertainty and high inflation, could have an impact on the economy during the second half of the year.

INDEC will release the Monthly Estimate of Economic Activity (EMAE, for its Spanish initials) for June this Wednesday and LCG consulting firm analyzed what it will show. “Key sectors like industry and construction registered a 1.3% and 1.5% monthly seasonally adjusted drop. On the other hand, consumption indicators had an uneven behavior: value added tax and credit card loans showed a 6% and 1% monthly seasonally adjusted growth, while imports of consumer goods contracted 3% monthly.”

“On the other hand, retail consumption showed a slight 0.3% monthly increase. In summary, we expect June economic activity to continue falling, around 0.5% monthly. In annual terms, this would mean a 1.7% drop”.

The General Activity Index of consulting firm Orlando Ferreres presented a 4.4% interannual drop in June, while the seasonally adjusted measurement fell 0.5% when compared to May.

“This downward drag is of course explained by agricultural activity. With this exception, all sectors recorded an annual variation higher than the general level. In any case, industry and commerce in June also registered an acceleration in their drop, which is a reflection of the general cooling of the economy,” Ferreres explained.

The impact of devaluation

Consulting firm Equilibra pointed out that the devaluation after the PASO and the volatility of alternative exchange rates, added to a higher inflation expected in the second half of 2023, will also have an impact on economic activity.

“Following the devaluation after the 2019 PASO, economic activity between July and the end of that year fell by almost 4% in seasonally adjusted terms. If something similar happens now, GDP in 2023 will fall an average of 3% (before the PASO we expected an annual contraction of 2.5%.)”

“Prospects for economic activity have deteriorated following the depreciation of the exchange rate and the start of massive adjustments regarding prices of goods and services. The contraction effects of these events will translate into more recession and, potentially, a new monthly inflation low. Decisions regarding prices, consumption and investment naturally tend towards a negative balance that diverges from recovery and stabilization,” said Martín Calveira, research economist at IAE Business School.

“In turn, the level of uncertainty in an economy with persistent imbalances affects growth despite short-term impulses. This exposes [economic] activity to a contractionary dynamic that could potentially be strengthened in the second half of the year, a consequence of avoiding corrections in a presidential election year,” Calveira added.

The acceleration of inflation and the jump in alternative exchange rates conspires against the growth of consumption, which has a marked importance in GDP. “The loss of purchasing power of our currency is partly because people are fleeing the peso, but also because the Central Bank is printing a lot. Some of it also has to do with the flight of Argentines’ savings, which are turned into dollars that go under the mattress. This means that domestic demand is being de-financed, which causes consumption and investment to fall”, said Aldo Abram, Executive Director of Fundación Libertad y Progreso.

“I believe that what we have been seeing as a recession is going to deepen until there is some tranquility, which may be provided by the presidential candidates, as well as the election results. The key is how much more perception of risk we are going to have: the higher it is, the less we consume and the more we save and look for dollars,” concluded Abram.

Originally published in Ámbito


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