The government has become convinced that the economy is in a recession, based on three key factors. These include a decrease in inflation, a collapse of private credit and a reduction in the deficit. These indicators have been reflecting the impact of the shock plan on consumption, activity, and investment since the beginning of the year.
The Minister of Economy, Luis Caputo, had initially predicted that inflation would reach 40% in the first quarter. However, it ended up being much higher at 65.5%, despite an initial shock plan that resulted in a big jump in prices and a strong fiscal adjustment. This led to prices starting to decline. However, this trend was short-lived as the Central Bank revealed that there was a significant collapse in peso loans to the private sector due to factors such as inflation acceleration and negative interest rates policy leading to a large reduction in banks’ use of fixed terms for lending.
Javier Milei, Minister of Economics, during his inauguration speech had warned about challenging times ahead but hoped for improvement. However, recent data showed otherwise as there was a 5% year-on-year fall in economic activity in December with significant drops in construction and automotive production along with layoffs and suspensions due to diminished sales and commercial debts. Different sectors such as tire industry and investment also presented negative trends with considerable declines in activity reflecting deepening economic downturn. Economists consulted by the Central Bank expect an increase in unemployment accompanied by an contraction of 3% economy if inflation is not reduced further.
The concern remains whether government will be able to lower inflation without risking another devaluation further accelerating prices if deficit is not reduced.