Three key factors convinced the Government that the economy was entering a recession: the reduction of the deficit, a 20% decrease in inflation, and the collapse of private credit. These were indicators of the impact of the shock plan on consumption, activity and investment implemented at the start of the year.
Minister of Economy, Luis Caputo, stated that people were not going to validate the 30% inflation increase that occurred in December, January and February. He suggested that the slowdown in prices was linked to a decrease in demand.
In December, a plan designed by Javier Milei provided for a contractive path due to sudden devaluation and a strong fiscal adjustment. However, the peak of inflation was much higher than anticipated, reaching 65.5% in the first quarter, according to the REM, and over 100% if measured from December to March.
The new official projection for January was similar to the Central Bank’s market survey (21.9%). The exchange shock affected prices, but they were moderated by cuts in public works spending and transfers to provinces, along with pension and salary payments.
The Central Bank reported a 16% monthly collapse in peso loans to the private sector in January, due to the acceleration of inflation and a negative rate policy.
The Central Bank recognized that the credit collapse reflected the economy’s entry into a recessive phase of the economic cycle. This was due to high uncertainty at the end of the previous administration and the price corrections and macroeconomic imbalances corrected by the new government.
Javier Milei warned in his inauguration speech that hard times were ahead, but assured that there is light at the end of the tunnel. However, the latest data showed a 5% year-on-year decrease in activity in December due to electoral uncertainty, with a further worsening during the transition.
In January, the Construya index, which measures the activity of 11 representative companies in construction, dropped by 28.2%. Automotive production also fell by 16.7%, leading to suspensions and layoffs due to the halt in public work and extended vacations due to lower local sales and accumulated commercial debt with suppliers.
The tire industry saw layoffs due to a fall in demand, leading to strikes. The starting activity level data for 2024 confirms the depth of the recession, with a decrease in demand for mass consumption goods of 7-8% year-on-year.
Investment also fell by 16.7% year-on-year in December in terms of physical volume, the largest decline since the pandemic restrictions in August 2020. This was mostly due to a drop in imported capital goods (40.5%) due to the exchange rate jump in December.
Economists expect the economy to contract by 3% and unemployment to increase by almost 3 points to 7.8% in 2024. The question remains whether this will lower inflation. If the government fails to accumulate dollars and reduce the deficit, another devaluation could occur, which would further accelerate prices.