“There is going to be stagflation, because fiscal reorganization will have a negative impact on economic activity,” Javier Milei recently said. The president-elect also estimated that it would take 18 to 24 months to end inflation. Different economists agree with his diagnosis, stating that they expect Argentina’s economic activity to drop next year but that inflation will remain high. By definition, this is known as “stagflation.”
“Argentina’s economy has been experiencing stagflation since 2011. By the end of 2023, GDP per capita will have fallen between 10 and 15% since then. Inflation has been growing steadily, especially in recent years. In other words, this is nothing new; we expect this process to intensify,” said Santiago Manoukian, head of research at Ecolatina consulting firm.
The depth of the fall, as well as the time it will take for activity to recover, will depend on the steps the new government takes. Judging from Milei’s first definitions, analysts foresee a complicated scenario in at least the first half of the year, with consumption, job creation, and investment all falling. The recovery of the agricultural and energy sectors could act as a counterweight.
Analytica consulting firm director Claudio Caprarulo pointed out that “it remains to be seen which measures Milei is going to implement and how he will do that.”
“It is difficult to estimate how big the recession will be and how long it will last. The time frame will also depend on how successful and sustainable Milei’s policies are. We do know that this will surely lead to a drop in economic activity due to less public spending and a fall in income and employment,” he stated.
A complex scenario
“We foresee a year of stagflation. A year of recession with high inflation. Inflation will tend to accelerate next year as a result of the correction of relative prices that the next government will carry out and fiscal tightening. The correction of relative prices will mainly affect utility tariffs, prices that have been government-regulated, and the official dollar exchange rate. Due to inflationary acceleration, they will have a negative impact on households’ net income and thus on private consumption, which represents close to 70% of the GDP,” Manoukian analyzed.
The economist from Ecolatina foresees a “very difficult” first part of the year in socioeconomic terms. “If the incoming government is successful in stabilizing the economy, that could lead to a relative improvement in the second part of 2024.”
These recessionary effects will be offset by some positive factors. “The agricultural harvest will recover thanks to better climate conditions. The energy trade balance will also move from a deficit to a surplus. Tourism could also continue to be favorable, and the knowledge economy sector could also improve,” said Manoukian.
The economist concluded that “economic activity will have a lot of sectorial heterogeneity next year, precisely because sectors oriented to the external market can better surf the economic recession and try to somehow compensate for the rest of the recessive effects on activity and employment.”
“We also know that there has to be some kind of stabilization plan for the economy. Otherwise, we will see an even greater deterioration,” EPyCA Consultores director Kalos said.
“The first half of 2024 will be very bad, with inflation accelerating and economic activity dropping. The question is whether the second half of the year will be better. Because that’s where we could have better results if things are done right.”