2024-11-03 06:21:00
Ten months after Javier Millay took over as the country’s chief executive, Argentina’s economy continues to face difficulties, instability and deep turmoil. Poverty figures for the first semester expose a devastating reality: more than half of Argentines live below the poverty line. Although inflation is showing signs of slowing, it remains among the highest in the world, with an annual rate of 209% as of September. In addition, economic activity fell by 5.2% annually in the first quarter and by 1.7% annually in the second quarter.
It is true that the starting point is already difficult; at the end of 2023, the poverty rate will exceed 40%, and it did not appear suddenly this year. Rather, it is enhanced by the impact of inflation, which wastes real wages and extends the situation of “no money” to more households. Given that poverty in Argentina is entirely determined by income levels, inflation is the main source of poverty: if wages do not grow at the same rate, more and more people will fall below this threshold. In this context, it is worth remembering that the cumulative inflation rate between December 2019 and December 2023 reached 1,193%, while according to the Indec index, wages grew by 991%, which means that purchasing power fell by 16%.
Likewise, economic activity has been declining steadily since September 2023, even before the election, and long-term growth trends have been stagnant for more than a decade.
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Once you establish this perspective, you can gain a clearer understanding of current economic conditions and what to expect in the coming months.
Data for August showed a recovery in activity for the second consecutive month in a non-seasonal series of monthly changes. This indicator is key to determining whether the economy is indeed rebounding, because in a recessionary context, year-on-year changes will continue to be negative until activity levels return to the values they had before the recession began. In other words, this analysis allows us to determine whether the economy has hit bottom or is starting to surface.
When examining the data, activity bottomed out in April. It has seen a modest rebound since May. In particular, July saw strong growth in activity, with the positive trend continuing in August. Various sectoral indicators such as industrial production, construction and vehicle registrations suggest that activity levels may continue to increase in September, consolidating the recovery.
Therefore, GDP growth in the third quarter may be close to 3%, marking the potential beginning of a growth path. In any case, the traditional way of measuring annual national accounts is to take the average of the four quarters of a year and compare it with the average of the four quarters of the previous year. This means that although the economy also grew in the fourth quarter, 2024 will be marked as a recession year, even if it recovers in the second half of the year and exceeds December 2023 levels.
Beyond the statistics, the foundations are being laid for Argentina to grow again. First, inflation has been successfully controlled: at the beginning of the year, the monthly inflation rate was 20%, and by the end of December, the inflation rate was close to 2%. In one year, prices will rise by 119%, a far cry from the 211% in 2023. Second, despite being weak in both chambers, the administration has demonstrated the political power to enforce its agenda. This allowed approval of the Basic Law and the financial package and retained veto power over retirement reform and the university budget. Beyond the savings from these congressional victories, the fact is that the government has shown it has the courage to take unpopular measures to maintain its core goal: fiscal balance. The latter, in turn, helps to gain credibility and trust in the market. One example is that since December 2023, sovereign bonds denominated in US dollars have risen by more than 70%, and country risk has fallen to its lowest value in five years.
As for wages, according to the Indec index, they reached their lowest point in March, and since then until August, their purchasing power has recovered by 12%. This dynamic caused the poverty rate to reach 50% again in September, according to estimates from the University of Torquato di Tela. In addition, if the current growth rate is maintained, it may reach the level of November 2023 in the short term, or even exceed it sometime next year.
It is worth noting that wage growth in the unregistered private sector has been stronger than in other sectors. The actual growth rate in July alone reached 10.6%, and increased by 6.2% in August. This is relevant because the unregistered private sector is the most vulnerable link in society and has suffered the most losses in purchasing power in recent years.
An outstanding issue for the economic team remains the removal of the exchange rate. This is critical for efficient allocation of economic resources, elimination of price distortions and attracting investment, which is critical for increasing productivity. With or without inventories, Argentina’s economic growth rate next year is likely to be close to 5%. However, the removal of capital controls will determine whether this growth is sustained and consolidated over time, or whether it is diluted in the long term.
Second, implement structural reforms that will ultimately abolish the rules of Argentine business and promote free competition and an increase in the average productivity of the economy.
All analyzes convince us that Argentina has escaped the risk of hyperinflation and its economy has begun to stabilize. The decline in economic activity has slowed, and although there are differences between industries, an initial growth trend emerged from the third quarter of this year and is expected to continue next year. At the same time, wages will remain unchanged and the deflationary process will allow purchasing power to restructure. In short, the recovery begins in the second half of the year, starting underground, but laying the foundations for the continuation of the process and for Argentina to escape not only from recession, but also from the stagnation it has suffered.
*Economist. Liberty and Progress Foundation.
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**Interview with Dr. Ana Sofia Martinez, Economic Analyst, on Argentina’s Economic Crisis and Poverty Rates**
**Interviewer:** Thank you for joining us today, Dr. Martinez. The latest report indicates that Argentina’s poverty rate has surged to 52.9% under President Javier Milei’s administration. What factors do you believe have contributed to this alarming increase?
**Dr. Martinez:** Thank you for having me. The rise in poverty in Argentina is multi-faceted, but it fundamentally stems from the runaway inflation that has affected purchasing power dramatically. Despite efforts to stabilize the economy, we are seeing inflation rates as high as 209% annually. This means that even if wages nominally increase, they fail to keep up with the pace of rising prices, pushing more households below the poverty line.
**Interviewer:** You mentioned inflation. How significant is the impact of the inflation rate compared to other economic indicators?
**Dr. Martinez:** Inflation is indeed the primary driver of poverty in Argentina. While other factors like economic activity and employment rates play a role, they are often intertwined with inflation. For example, when inflation rises, it erodes real wages and diminishes purchasing power. The cumulative inflation from December 2019 to December 2023 was a staggering 1,193%, while wages only increased by 991%. This gap is what has led to a significant decline in living standards for many citizens.
**Interviewer:** With the poverty rate now exceeding 50%, what measures do you think the Milei administration should take to address this crisis?
**Dr. Martinez:** The administration needs to focus on both immediate relief and long-term economic reforms. Immediate measures could include increasing social assistance and implementing policies aimed at controlling inflation further. Long-term, the government must work on fiscal balance and structural reforms to stimulate economic growth sustainably. They need to create an environment that encourages investment and job creation so that we can see rising wages and improved economic activity.
**Interviewer:** There have been some positive developments reported, such as signs of economic activity rebounding. Could you elaborate on that?
**Dr. Martinez:** Yes, there were indicators in the third quarter suggesting a potential recovery in economic activity—like a projected 3% GDP growth. This is encouraging, as it may mark the beginning of a turnaround in the economy. However, it’s crucial to remain cautious. Even if there are positive signs now, the underlying issues, such as persistent inflation and high poverty rates, need to be addressed robustly to ensure that any growth is sustainable.
**Interviewer:** considering the challenging economic reality, what do you think the outlook for Argentina will be in the coming months?
**Dr. Martinez:** The outlook is mixed. While we might see some stabilization and modest recovery, the high poverty rate and inflation remain critical challenges. If the government successfully implements its agenda while keeping inflation under control, there’s a chance for improvement. However, the recovery would take time and consistent effort. It will be essential for the administration to balance austerity with the need for social support to reduce poverty effectively.
**Interviewer:** Thank you, Dr. Martinez, for your insights on such a complex situation. It’s crucial for us to continue monitoring these developments as they unfold.
**Dr. Martinez:** Thank you for having me. It’s important to keep the dialogue open on these pressing issues.
