In the past few months, the government has been closely monitoring several key factors that have led them to believe that a recession is imminent. These include a drop in the deficit, signs of inflation slowing down, and a collapse in private credit. Despite their initial optimism, the government’s projections about inflation rates were off by a significant margin.
The Minister of Economy, Luis Caputo, had originally predicted that inflation would remain stable at 40% in the first quarter. However, this proved to be much lower than expected as it ended up at only 65.5%. This was largely due to the impact of the shock plan on consumption, activity and investment at the beginning of the year.
Central Bank officials have also revealed that there was a significant collapse in peso loans to private sector businesses due to various factors such as rising inflation and negative interest rates policies. The decrease in loan usage has caused many businesses to cut back on investments and reduce their workforce.
During his inauguration speech, Minister of Economics Javier Milei acknowledged that challenging times lay ahead but expressed hope for improvement. Unfortunately, recent data shows otherwise as there was a 5% year-on-year fall in economic activity in December alone. Additionally, construction and automotive production dropped significantly while layoffs and suspensions increased due to decreased sales and commercial debts.
Several industries are also experiencing negative trends with considerable declines in activity levels reflecting the deepening economic downturn. For instance, the tire industry is facing major challenges while investment is also taking hits due to reduced demand from consumers. Economists consulted by Central Bank are projecting an increase in unemployment with an estimated contraction of 3% for the economy overall.
As concern grows about reducing inflation and avoiding further devaluations of currency prices if deficits remain high, economists are closely watching whether or not governments will be able to take necessary actions before it’s too late.
In summary, despite initial optimism from some sectors like agriculture and mining activities which showed positive growth rates during December month; concerns over rising costs continue to loom large as inflation rose from 30% -20%, leading many businesses into financial distress.