Drought, inflation and rising rates: a perfect combo to lower the level of activity

Drought, inflation and rising rates: a perfect combo to lower the level of activity

The historical drought suffered by the Argentine countryside is at the center of all analyzes and projections. REUTERS/Matias Baglietto (MATIAS BAGLIETTO/)

What was only a suspicion a few months ago has now become a certainty. Argentina’s economy is heading inexorably towards a recession, which could even be the most severe since 2009. With each passing week, the calculations are corrected downwards, given the confirmation of a very negative scenario from all angles. The historic drought suffered by the Argentine countryside dominates all projections. The phenomenon has been called a “black swan” by Portfolio Personal Inversiones (PPI) in a report to its clients. This means that it is something that was not in the calculations a few months ago. Although it was known that the lack of water would cause problems, even the most pessimistic did not expect this scenario, considered dramatic at this stage.

PPI notes that the country will run out of trade surplus this year, while imports will suffer a reduction of at least $11 billion. “The drought will have a direct impact of 2.1% on GDP. But we must add to this that the pinching on imports will intensify, with an impact that is difficult to quantify. The latest calculations indicate that GDP could suffer a drop of 3%, although the danger is that it continues to be revised downwards.

The last five months of 2022 have been recessive, with month-by-month declines, and the start of 2023 would not show a reversal of this trend. But the most worrying comes later, after a drought that would affect the level of GDP by 2% this year

The economy grew by 5.2% in 2022. But this expansion had the particularity that almost everything was concentrated in the first half of the year, continuing the post-pandemic rebound of 2021. In contrast, the last five months have shown consecutive declines, to activity level. Everything indicates that this trend will be accentuated in these first months of the year. And for the future, there is no sign of improvement, quite the contrary.

In addition to the effects of the drought which are beginning to be palpable on activity, other elements will work against it in 2023, with the consequent impact on the presidential elections. Here are some of the most relevant:

– Inflation is not easing and is impacting wages: The start of 2023 could not have been worse, with increases of more than 6% in the index and increases of 9.8% in food only in February. It is inexorable that this will have a negative impact on incomes, which continue to lose purchasing power. This effect was less felt in 2022, as the fall in wages was offset by the increase in employment, especially in the informal sector. But this year the decline in economic activity will work against job creation, to which will be added the drop in income in real terms.

    Food inflation jumped 9.8% and will have a hard impact on wages (NA)
Food inflation jumped 9.8% and will have a hard impact on wages (NA)

-The interest rate would be adjusted upwards: The Central Bank is due to make a decision at today’s board meeting, but there’s a good chance it will have to raise them given the new inflationary boost. This implies a higher cost for businesses and an increase in the cost of credit, which will also impact the public when it comes to financing themselves with a credit card or personal loans.

-Electoral uncertainty: The proximity of the elections does not favor economic activity. This happens because investment or purchase decisions are postponed pending election results. This is a classic phenomenon in Argentina, which is also characterized by an increase in dollarization and consequent pressure on the foreign exchange market in the months preceding the elections. These tendencies are even exacerbated by the PASO, which takes place at the beginning of August.

– Disrupted international context: Banking crises now add to the sharp rise in interest rates in developed markets, first in the United States with Silicon Valley Bank and then with Credit Suisse in Europe. All this generates a greater outflow of funds from emerging markets, causing a sharp increase in country risk and making financing options difficult for companies.

Continue reading:

Exchange rate differential, drought, inertia and heat wave: why the Economy estimates that inflation accelerated in February

Inflation data forced the Central Bank to review the management of the official dollar and the interest rate

Rise in inflation: for economists, the March index could be close to 7%

The central bank’s dilemma: if it raises rates, it will also make its own debt more expensive

Melissa Galbraith
Melissa Galbraith is the World News reporter for Globe Live Media. She covers all the major events happening around the World. From Europe to Americas, from Asia to Antarctica, Melissa covers it all. Never miss another Major World Event by bookmarking her author page right here.For tips or news submission: mega.glcup@gmail.com